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?
Great point. I am still buying if I feel a stock is at or undervalue. Check out my recent buy.
Nice buy on PM. I’d be buying more if I wasn’t so heavy already in tobacco.
Take care!
Thanks, How is feedly going?
FFDividend,
I like feedly on mobile but on my computer I prefer the way the list is compiled on Blogger. It seems easier to read in a list format. I also may not be using feedly the most efficient way yet since it’s still new.
the Dow doesn’t influence my buying decisions per say, but I am much more likely to compare my portfolio’s performance with the Dow as opposed to the S&P. my portfolio is mostly made up of blue chip dividend payers, which is exactly what the Dow is comprised of. (and in fact, I own about half of the Dow 30) The extremely diverse lot of the S&P, which includes Best Buy, Netflix and JC Penney–has no real relevance to my portfolio.
I guess that makes sense if your portfolio is heavily weighted with Dow stocks. The Dow is such a small group of stocks that are always changing around so I have a hard time using it as a measure.
Thanks for stopping by !
Whenever I’ve tried to compare to a benchmark I’ve always used the S&P 500 as I think that’s more representative. Like you I’m mainly focused on the income stream, but I still like to periodically check in against a benchmark to make sure I’m not completely lagging behind. If over a multi year period I lag the benchmark by more than 5% then I’m probably leaving money on the table. Plus the DJIA price weighted mechanism is just weird. Before the changes to the DJIA earlier this year IBM accounted for about 10% of the average now it’s down to around 7% after the changes. I’m not entirely focused on the DJIA or S&P 500 reaching highs but I can’t help but notice it as that’s all that you ever hear if you watch/listen to any financial news.
I’m with you on the S&P as a benchmark. If we can’t keep up with the S&P then we might be better off putting everything in a fund like SPY. Also 10% for one stock is way too high as you mention. I don’t even know how they weight the stocks when they switch them out. That’s another reason I don’t really care about what the DOW is doing. I think It’s more of a “feel good” measure when you see that you are beating the benchmarks as a DG investor.
Take care!
Take care!
Thank you for this great insights. Now me and my friends know the importance of DJIA in our investment portfolio. Keep up the good work.
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