The widely-watched Dow Jones Industrial Average of 30 stocks is often regarded as a proxy for the U.S. stock market. But, as national radio host Don McDonald writes in this article, it's a poor proxy indeed. 

The time has come for a new stock market benchmark. All of the press about “the Dow" reaching a new, all-time high (finally) has convinced me that someone needs to start a grass-roots movement to change the way people judge the movement of stock prices.

First, a little lesson: The oft-quoted "the Dow" is the Dow Jones 30 Industrials Average. A relic from the days when our economy was driven by manufacturing of large industrial products like locomotives and bulldozers, the Dow tracks the performance of just 30 publicly-traded companies (out of a universe of thousands). As a representative sample of American stocks it is seriously lacking, with just one software firm represented (Microsoft) and only two retailers (Wal-Mart and Home Depot).

In addition to representing only a small sample of the total U.S. market, only 10 of the 30 stocks in the Dow Jones Industrials were actually higher on September 30 than they were in 2000. So, in essence, the new “record highs” in the “stock market” we are discussing reflect the performance of just 10 companies. How can they possibly represent the entire equities market?

I think investors should be able to see a global index that is market-capitalization weighted, one that reflects firms of various sizes in many different countries. Since I want to be fair to the folks at Dow Jones (I'd hate to deprive them of all that free publicity), I propose that for our new market barometer we adopt the Dow Jones Wilshire Global Total Market Index.

This index was created in 1991 and consists of almost all of the stocks traded on 56 world markets (more than 98 percent of the total value of the world’s equity markets). Using a complex set of rules to minimize the effects of poor liquidity in smaller world markets, this index is heavily weighted toward the markets of developed economies with the bulk of the stocks being in U.S. based firms (the Wilshire 5000).

The Dow Wilshire Global Index more accurately reflects the global economy in which we, as investors, operate (or should operate). Even though it includes small-cap stocks and emerging markets, it will tend to be far less volatile than the better known indexes. This is because wild swings in a single nation’s markets are dampened by the non-correlating performance of other markets.

This non-correlation was probably best illustrated by the collapse of the Japanese stock market in the 1990s. From 1990 to 2000 the Nikkei 225 lost half its value, while the S&P 500 more than quadrupled. Over most of that period (1991-2000), the Dow Wilshire Global almost tripled.

For the accounts we privately manage for clients, we use a more complex equity benchmark. But for do-it-yourself investors who believe in global diversification, this index is far more useful than the Dow. In a single number it will show you why worldwide diversification matters.

Through October 25, this global index was up 15.2 percent for the year to date, compared with about 13 percent for the S&P 500 Index.

For the nearly seven years since the start of 2000, the S&P 500 Index had a cumulative total return of 5.1percent; the global index was up 28.8 percent.

Here’s something to ask yourself: How did the equities in your portfolio stack up against 98 percent of the world market?