Why the Dow Is a Dumb Index
The Dow Jones industrial average is hopelessly archaic.
The Dow Jones industrial average is hopelessly archaic. When it was created in 1896 with just 12 stocks, its chief selling point was that it could be quickly calculated using only pencil and paper. Today, the Dow consists of 30 large companies, chosen by editors of the Wall Street Journal.
The small number of stocks is one shortcoming. By contrast, other important benchmarks of the U.S. stock market contain 500 stocks (Standard & Poor's 500-stock index), 1,000 stocks (Russell 1000) and about 5,000 (Wilshire 5000).
Moreover, Journal editors tend to add companies after they've passed their prime, giving rise to the argument that entering the Dow is more curse than blessing. Over the past ten years, new Dow stocks lost an average of 20% in the first year after their inclusion. Microsoft is 38% below its level when it was added in late 1999. American International Group, which entered in 2004, is already out of the Dow. Bank of America is off 58% since joining in early 2008.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The Dow's biggest fault is that it weights stocks according to share price rather than market capitalization. As a result, a 1% move in the price of IBM, which closed at about $120 in mid August, counts about six times as much in the Dow as a 1% change in Intel, which closed at $19, even though IBM's market value is only 51% greater than Intel's.
Gus Sauter, chief investment officer at the Vanguard Group, says fund managers don't pay attention to the Dow. "If you're trying to get a handle on what the market is doing, you'll look at the S&P 500 or a total-market index." Perhaps the Dow's biggest accomplishment is that, warts and all, it has retained its status as the public face of the U.S. market.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
GM Stock Accelerates After Earnings Beat
General Motors beat expectations for the first quarter and raised its outlook for the year. Here's what you need to know.
By Joey Solitro Published
-
Stock Market Today: Nasdaq Soars Ahead of Tesla Earnings
The EV stock rose nearly 2% ahead of its highly anticipated Q1 earnings report, due after tonight's close.
By Karee Venema Published
-
Stock Market Today: Markets Rebound Ahead of Big Week for Earnings
Equities rallied on easing geopolitical tensions, upcoming quarterly results.
By Dan Burrows Published
-
Stock Market Today: Nasdaq Spirals as Netflix Nosedives
A big earnings boom for credit card giant American Express helped the Dow notch another win.
By Karee Venema Published
-
Stock Market Today: S&P 500, Nasdaq Extend Losing Streaks
The two indexes have closed lower for five straight sessions.
By Karee Venema Published
-
Stock Market Today: Dow Slips After Travelers' Earnings Miss
The property and casualty insurer posted a bottom-line miss as catastrophe losses spiked.
By Karee Venema Published
-
Stock Market Today: Stocks Stabilize After Powell's Rate-Cut Warning
The main indexes temporarily tumbled after Fed Chair Powell said interest rates could stay higher for longer.
By Karee Venema Published
-
Stock Market Today: Stocks Reverse Lower as Treasury Yields Spike
A good-news-is-bad-news retail sales report lowered rate-cut expectations and caused government bond yields to surge.
By Karee Venema Last updated
-
Stock Market Today: Nasdaq Leads as Magnificent 7 Stocks Rise
Strength in several mega-cap tech and communication services stocks kept the main indexes higher Thursday.
By Karee Venema Published