Don't Let the Indexes Mislead You

Today the Dow Jones Industrial Average (DOW, or DJIA) dropped banrupt General Motors from their index of the 30 largest US industrial companies. See story Therefore, when looking at the DOW, or any other index that measures performance, we must realize that it is not a fully accurate picture of reality.

For instance, if I owned three stocks over the last year which I paid $100 each for, then my total investment is $300. If one goes bankrupt, my portfollio drops in value to $200.

But if there were an index that tracked those three stocks, and when the one stock went belly up, they simply replaced it with another $100 stock, then the index would show no loss. THe index would still have a value of 300. Therefore, anyone who looks at that index would incorrectly assume that had they been invested in that index over the last year, that they would have lost no money.

Just a heads up to let you know that numbers can be misleading sometimes, even when no one is trying to mislead.