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.
Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.