The Historical Performance of the Dow Jones Industrial Average “Index” Reflects the Stock-picking Ability of Dow Jones Selectors
Yesterday it was announced that the Dow Jones Industrial Average is dumping Kraft Foods in favor of United Health Group (which I have owned shares in since mid/late 2010).
This raises an issue that I don’t think people focus on enough: the Dow is not really an “Index” at all. Rather the Dow is just a portfolio of a select group of 30 of our largest companies. Henceforth, the performance of the Dow will be impacted by this decision. If United Health Group stumbles and Kraft soars, the Dow will be lower than it otherwise would have been. Worth keeping in mind.
The upshot is that the average investor should have a healthy skepticism of this “index,” even moreso than of any others. But not just because of “flaws” in the index, as there are flaws in the S&P 500 index, because of how it is weighted. No, here investors should have skepticism because this is not an index at all, even though many people think of it as one.