Sunday, April 05, 2009

buy and hold the original Dow?

The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928?

The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.

What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?

So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?

And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).

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