Staying Power

 A recent blog post from Josh Brown, the Reformed Broker, noted that the Dow Jones Industrial Average celebrated its 115th birthday.  This index, which is composed of 30 stocks today, has been a touchstone for our nation’s sense of the market.

One can quibble with the scope and relevance of the Dow today.  But, it’s important to note that stamina and lasting power means something in the world of indexes. 

Too often today, indexes are created to fill the needs of financial products.  With the dawn of Exchange Traded Funds (ETF’s), indexes have sliced and diced the investment landscape at the same time that a companion Exchange Traded Fund is being packaged and sold.  To find an appropriate composition, components may be back-tested so as to get a sense of how the index would have behaved in the rear-view mirror.

Critics have noted that the result is a process that seeks to optimize historic returns, possibly to the detriment of the current or future investor.  Index creation may seem to be more of a function of a sales objective than representative of a long-term component in the stock or bond market universe. 

With teenagers and toddlers populating the world of indexes today, I can appreciate the lasting power of the centenarian Dow.

 

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