A lot of people compare their performance to and keep track of the Dow Jones Industrial Average. When someones says how the market is doing they are typically referring to the Dow. Currently it’s over 1600 in value. What does this mean though? Should you really compare your portfolio against the Dow?
The DJIA is an indicator of stock values based upon 30 blue-chip stocks currently. From their website, the Dow was founded in 1882 by Charles Dow, Edward Jones and Charles Bergstresser.
The companies that have made up the Dow have changed quite a bit over the years. As recently as September, three new stocks were added and three were taken away. Nike (NKE), Goldman Sachs (GS) and Visa (V) were added and Hewlett Packard (HPQ), Bank of America (BAC) and Alcoa (AA) were removed. The index committee decided that due to their low stocks prices and the need to diversify sectors that these changes would be made.
So if the Dow is adding growth candidates and removing laggards then shouldn’t you be doing this with your own portfolio? I would say, absolutely! If you took a look at My Business Plan, you will see reasons that I will consider dropping companies from my portfolio. Just like with the DOW, you should monitor your portfolio and make changes to diversify and protect you income stream. Alcoa (AA) for example, cut their dividend back in 2009 from 0.17 to 0.03. Most DG investors would have dropped the stock immediately.
So back to the question about comparing your portfolio to a benchmark… As a dividend growth investor, I’m more concerned about my income stream increasing than I am in the total value of the portfolio. I try to ignore the market noise and make consistent purchases adding to this income stream and watching my dividends snowball. However, if your dividends are constantly increasing, this comes from an increase in earnings from these companies which will cause the stock prices to rise over time. So I do look to see how my portfolio is doing against the S&P 500 which is a much larger and better representation of the stock market in my opinion. This comparison is mainly for curiosity and peace of mind.
With the markets hitting all time highs, many people are holding onto cash and waiting for a pullback. A lot of people were also expecting a pullback a year ago. If you didn’t invest this year then you would have missed out on a lot of capital appreciation. While I do believe markets are slightly overvalued, I don’t think we are close to extreme overvaluations. As Jim Cramer often says, “there’s a bull market somewhere”, I continue to look for the best values I can put my money into. I do plan to hold onto a little more cash going forward in case of a correction. Whether the markets are up or down though, I will still be making consistent purchases to build my income stream.
How does the Dow influence your decisions?