I seem to be on an explaining basic principles kick the last few days.
I saw this story on CNBC this morning:
The Dow Jones industrial average just did something it has never done in its 121-year history.
The 30-stock average is now up more than 5,000 points in a year, marking its biggest annual-points gain ever. This following a 140-point rally Monday which sent it to an all-time high.
Sounds impressive. And it is. But let's take a look at two time periods:
According to MacroTrends.net, from January 2017-November 2017, the DJIA (that's the acronym for the Dow Jones Industrial Average for those of us in the know...), rose from 20,181.82 to 24,272.35. That's an increase of 4,090.43 points.
Cool. But what does 4,090.43 points really mean? I have no idea. It's some sort of an index based on the value of 30 stocks, defined by some group who like to do those sorts of things.
But is 4,090.43 a big increase?
Take another randomly chosen time period, say, January 2009-November 2009. In that randomly chosen period, the DJIA increased from 9,345.00 to 11,793.12. That's an increase of 2,448.12 arbitrary points.
It looks like 2017 beats 2009, right?
Not quite.
Because the starting point in January, 2009 was much smaller than the starting point in January 2017, if we convert the changes to percentage terms, in the first 11 months of 2009, the DJIA increased by 26.2%. In 2017, the comparable percentage was 20.3%.
Given the choice would you rather earn 26% on your investments or 20%?
Both are good.
But you would draw the wrong conclusion if you just looked at the absolute point change, rather than percentages.
