Unfortunatelly, using the Dow Jones for historical measurement is meaningless, because they keep changing the components of the index. There is only GE still existing of the original 12 Dow Jones company. Once a company underperforms, it gets replaced by a better company, producing better results. "On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications." Can you see the difference? Furthermore: "On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG." Now as an interesting exercise, let's re-replace the new ones with the old ones and recalculate the value of the Dow. I bet it would be around 9000..... Not to mention that it is a price-weighted index: "Some people criticize the DJIA because it is a price-weighted average, which gives relatively higher-priced stocks more influence over the average than their lower-priced counterparts. This can produce misleading results, as a $1 increase in a lower-priced stock can be negated by a $1 decrease in a much higher-priced stock, even though the first stock experienced a larger percentage change." Edit: Actually, the difference might not be that great in the case of the 1999 replacement, because it just happened a few months before the bubble burst, thus MSFT and Intel lost a great deal after that. Nevertheless the criticism is still valid....
Thank you. This is the kind of information I was interested in. It kind of reinforces my gut feeling that theres not much upside there.
What if they'd never changed the components of the DJIA? Or, more accurately, what if the last "n" changes weren't made, and the previous "n", and so on? Has anyone any info on this? Unfortunatelly, using the Dow Jones for historical measurement is meaningless, because they keep changing the components of the index. There is only GE still existing of the original 12 Dow Jones company. Once a company underperforms, it gets replaced by a better company, producing better results. "On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications." Can you see the difference? Furthermore: "On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG." Now as an interesting exercise, let's re-replace the new ones with the old ones and recalculate the value of the Dow. I bet it would be around 9000.....
the dow jones is not meaningless. however, it is a rough proxy. as long as people think it has meaning, - it has meaning. that sounds tautological, but the reality is that when people (and institutions) want to buy stocks, the dow is one way they do that - through futures, basket files, and the dow pit ditto for the S&P, which is of course a broader proxy and also the default benchmark for most equity mutual funds.