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My Dad: On Friday of last week, the US domestic stock markets took a big dive, largely because there was concern that China's growth is slowing. Not only is their growth slowing, but their stock market has been takin' it on the chin. It gained incredible amounts last year, something like 30, 35 percent. That's crazy for a stock market to gain that much. China had been encouraging that growth by encouraging people to borrow money and put it in the stock market. Their economic growth has been flying high for several years as a result. China isn't the largest economy in the world, but it's close. Their stock market going down is a big deal. So that spooked investors.
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The Dow lost 600 points on Monday. That was the eighth largest drop in history. From a points standpoint, that was really big. But you can't look at it like that, because it was starting from this really high level. It's around 16,000 right now. 600 points is nothing. If the DOW loses 600 points when it's sitting at 4,000, then that's something different.What does "the Dow" actually mean?
The Dow Jones Industrial Average consists of 30 stocks of 30 different companies. They add those companies' stocks all up together, and they get a number that they use to quantify how high they are on average. It's just an artificial quantification. But it doesn't really mean a lot to be honest with you. The Dow and any indexes like it are basically artificial constructs.
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No, but even people who understand the stock market sometimes do that. The economy and the stock market are two different things. The Dow isn't even a really good measure of the stock market. There are only 30 stocks, and they're all really big. The Dow Jones company selects the stocks that go in there very carefully because they want good, solid, strong companies. A better measure of the stock market would be the S&P 500, which has 500 stocks in it. Or the Russell 5,000. Gosh, what was your question?Is the Dow a good shorthand for the economy?
No. The economy is a different deal. The economy is Gross Domestic Product—the GDP. It's the financial output of a country. The stock market is often considered a predictor of the economy, but it's not always a really good predictor of the economy. They call it a "leading indicator." In other words, if the stock market goes up, then people start thinking the economy will do well. But the problem is the stock market, by its very nature, wants to go up. People make money when the stock market goes up. You can make money when the stock market goes down, but it's a lot more complicated and a lot more difficult.
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When the stock market has a crazy week, should people freak out?On Motherboard: AirBnB Hires Ex Clinton Aide to Make Nice with Policymakers
No. People should never freak out over the stock market. First of all, people need to remember that it's just money. Money only has importance insofar as it supports the major priorities in your life. If money becomes the major priority itself, you've got a real problem. The stock market going up isn't going to fix that. You can't freak out. Good decisions are never made in the heat of the moment. When the market goes down, one way to look at it is that stocks are on sale.When you say, "Good decisions are never made in the heat of the moment," are you giving me financial advice as a money professional, or life advice as my dad?
It's me giving you advice in all areas of life.Follow Drew on Twitter.
