The Dow, Explained

Q Dublin, What’s “the Dow”? — F.S., California

A Its full name is the Dow Jones Industrial Average, and while it’s often seen as representing the entire United States stock market, it’s actually an index of just 30 companies.

The Dow was established back in 1896 with 12 companies. These companies included General Electric; U.S. Leather (now dissolved); U.S. Rubber (now Uniroyal, part of Michelin); American Tobacco (broken up due to antitrust concerns); Laclede Gas (now Spire); and Tennessee Coal, Iron & Railroad (acquired by U.S. Steel).

Over the years, many companies have been added to or removed from the index. The Dow today consists of 3M, American Express, Apple, Boeing, Caterpillar, Chevron, Cisco Systems, Coca-Cola, Walt Disney, Dow (the chemical company, unrelated to the index), Exxon Mobil, Goldman Sachs Group, Home Depot, IBM, Intel, Johnson & Johnson, JPMorgan Chase, McDonald’s, Merck, Microsoft, Nike, Pfizer, Procter & Gamble, Travelers Companies, United Technologies, UnitedHealth Group, Verizon Communications, Visa, Walmart and Walgreens Boots Alliance.

The Dow first closed above 1,000 in 1972, and it topped 28,000 in November. It has been criticized for being a “price-weighted” index, with its value based on its components’ stock prices rather than their market values or some other factor. Here’s why that’s problematic: Pharmaceutical companies Merck and Pfizer both recently sported market values close to $210 billion. But Merck’s stock price, recently near $89, gives it much more influence in the index than Pfizer, with its recent stock price near $38.

*** Q What’s an investment’s “real” return? — W.T., Jefferson City, Missouri

A It’s a gain that has been adjusted for the effect of inflation. For example, if your portfolio gains 8% in a year and inflation for that year is 3%, your real return would be 5%. It’s good to keep inflation in mind.