LINDA WERTHEIMER, Host:
On Fridays, we talk about your money. And today we're going to ask how much stock to put in the stock market - not literal stock, the figurative kind. Strong earnings results from companies like IBM sent the stock market to a record high yesterday. The Dow Jones Industrial Average closed above 14,000 for the first time in history. The Dow is one of the stock indexes often cited as a benchmark of economic health, but does reaching 14,000 actually mean anything? We asked David Leonhardt, an economics columnist for the New York Times.
WERTHEIMER: I don't think it really is a number we should care about. I mean, Dow 14,000 is getting so much attention in the media. It's all over the newspapers. It's all over the television. But the idea that the Dow has reached 14,000 really isn't particularly meaningful for a couple of reasons. And the first is that the idea that stocks are rising shouldn't particularly be newsworthy because the price of nearly everything rises - thanks to inflation. The government prints more money each year and the price of bread and cars and stocks rise.
WERTHEIMER: What about the idea that the Dow Jones Industrial Average represents - what is it, 30 companies? If you were going to look at economic health based on stocks, would you do better to look at the Standard & Poor index, which is 500 stocks? Would that be a better measure?
WERTHEIMER: According to the Dow, a company like Caterpillar, which makes farm equipment and isn't actually that big a company, counts more toward the Dow, is considered more important than Microsoft, or Citigroup, or General Electric. And so while there were reasons for Charles Dow to do what he did, there really is no good reason for the rest of us to use the Dow as the main benchmark of the stock market.
WERTHEIMER: You also write in your column this week that the stock market's recent highs don't tell us much about the health of investments either. Why is that?
WERTHEIMER: The S&P 500 adjusted for inflation is actually still 17 percent below the peak that it reached in 2000. Now, if you do a slightly more complicated calculation and you include the dividends that people make on their S&P 500 mutual funds, and you include the typical fees they have to pay, it's only eight percent below its peak, but that's no record high. And so the idea that the stock market has never been better, which is really the implicit message in record high stock market, really isn't true.
WERTHEIMER: I've always operated on the principle that you don't necessarily get rich by investing in the stock market, although obviously some people do. What you mainly do is preserve your money. Now, is that right?
WERTHEIMER: That is right. And you actually do more than preserve it. Over long periods of time, you make money. And if you set aside money when you're in your 20s and 30s, and you invest it in a diversified way and don't pay really high fees to mutual fund managers, who somehow persuade you that they know more than everybody else, you are likely to get a really nice return over long periods of time. The thing that I think is unfortunate about all this hoopla surrounding Dow 14,000 is it causes people to think you get a really nice return almost always, and that's just not the way the world works.
WERTHEIMER: David Leonhardt writes the Economic Scene column for the New York Times. Thanks for being with us.
WERTHEIMER: Thank you.
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