The Dow Jones Industrial Average (DJIA) recently hit the milestone level of 20,000 points and then quickly shot past 21,000. This index may be the most publicized in the investing world, but only represents a fraction of all publicly traded stocks in the United States. Many of my clients and friends ask me “Why is the Dow sometimes up when my portfolio is down, or vice versa? What does the Dow have to do with my portfolio?” Let’s examine what constitutes the DJIA and how it impacts your portfolio.
History of the DJIA as we know it:
Who created it and when?
- Charles Dow and Edward Jones on May 26, 1896
What was the original intent?
- The aim of the index was to track stocks that were industry leaders in their respective areas of business at that time. The original components featured only 12 stocks, including companies such as American Cotton Oil, Distilling & Cattle Feeding, Tennessee Coal and Iron, and General Electric. GE is the only original stock left since the index was created.
How has it evolved?
- The index expanded from 12 stocks to 30 by 1928, the number of stocks in the index today.
- These 30 stocks represent less than 1% of all publicly traded companies in the U.S.
Who’s in and who’s out?
Companies are added and removed to reflect current industry stalwarts. The index will be different in another 25 years, most likely sooner. Did you know Apple is now in the DJIA?
Facts on the DJIA:
- Longest continuous tenure on the DJIA: General Electric: 110 years
- Shortest tenure on the DJIA: U.S. Realty: 14 weeks
- Average stock tenure on the DJIA: 23+ years
How do 30 stocks add up to 21,000?
The index brings the prices of all 30 stocks together and averages them. The average is then divided by a divisor to maintain the value of the index. As stocks come and go the divisor is adjusted to keep a consistent value for the DJIA. These changes over time allow the index to climb to levels that were not achievable had the historical stocks remained.
If the DJIA only tracks 30 U.S. companies, what index should we focus on?
Throughout the world there are more than 350 stock indices tracking the progress of national stock markets ranging from Australia to Zimbabwe. Additionally, there are 87 different indices in the U.S. alone; the DJIA is only one of them. Fixating on the DJIA—or any stock index—as a measure of your investment progress is not helpful.
What does this mean to me and my portfolio?
Most every portfolio is customized to an individual’s needs. Our planning process is designed to identify a thoughtful investment allocation to reach your goals factoring in your time-frame, risk tolerance, and withdrawal needs during the journey. Your personal portfolio is designed to help you reach your financial objectives, not track the exact performance of an index. To get a deeper understanding of how the Dow applies to you and the growth of your portfolio, contact a trusted financial advisor.