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Dow hits 40,000, but should we really care?

The Dow Jones Industrial Average has reached 40,000 points for the first time ever. While this milestone is grabbing headlines, it's worth questioning how much attention it really deserves.

The Dow is often seen as a symbol of the stock market's overall health. However, it's a bit of an outdated measure. Unlike broader benchmarks like the S&P 500, the Russell 3000, or even the TSX Composite Index, which include hundreds of companies, the Dow consists of just 30 well-known firms. This small number makes it somewhat misleading.

One major issue is how the Dow is calculated. Instead of reflecting the total value of its companies, it's based on the price of individual stocks. This method can result in puzzling weightings. For example, tech giants Apple, Microsoft, and Amazon are all part of the Dow. Despite their massive market values, they have less influence on the index than companies like UnitedHealth Group or Goldman Sachs because of their lower share prices. Together, these tech titans account for just over 10% of the Dow.

Boeing is another case in point. Its shares have dropped about 30% this year, trading around $182 on Friday. That's similar to Amazon's share price, which has risen 20% in the same period. Yet, due to the Dow's calculation method, both companies have roughly the same impact on the index.

Charles Dow's creation was groundbreaking in 1894, but over 130 years later, it might be time to shift our focus to more representative indices.

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