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.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
5 Stocks to Buy for a Trump Presidency
The race for the White House is heating up and these five stocks are set to benefit if Donald Trump claims victory.
By Will Ashworth Published
-
6 Target-Date Funds to Buy For Your Retirement
These six target-date funds are good set-it-and-forget-it options that are a staple of retirement plans.
By Nellie S. Huang Published
-
Stock Market Today: Dow Dives 410 Points After August Jobs Miss
A big slump in tech stocks thanks to Broadcom's post-earnings slide put pressure on the main indexes too.
By Karee Venema Published
-
Mixed Jobs Report Keeps Fed on Track for Rate Cuts: What the Experts Are Saying
Jobs Report The Fed will cut rates this month. The only question is by how much.
By Dan Burrows Published
-
Stock Market Today: Stocks End Mixed Ahead of August Jobs Report
The main indexes struggled for direction Thursday after data showed the labor market continued to cool.
By Karee Venema Published
-
Stock Market Today: Stocks Extend Slide Amid Cooling Labor Market
Stocks continued their September slump after job openings hit a multiyear low.
By Dan Burrows Published
-
Stock Market Today: Stocks Kick Off September With a Steep Selloff
Downbeat readings on manufacturing activity spooked the bulls in the month's first session.
By Dan Burrows Published
-
Stock Market Today: Dow Nabs Record High Ahead of Labor Day
Friday's price action was choppy ahead of the long holiday weekend, but an in-line inflation report and late-day burst of buying power kept stocks above water.
By Karee Venema Published
-
Stock Market Today: Dow Adds 243 Points Despite Nvidia Stock Slump
Nvidia shares stalled after the chipmaker's earnings report, while the Dow survived a late-day selloff.
By Karee Venema Published
-
Stock Market Today: Stocks Retreat Ahead of Nvidia Earnings
Markets lost ground on light volume Wednesday as traders keyed on AI bellwether Nvidia earnings after the close.
By Dan Burrows Published