October 21, 2023
The Dow 30, also known as the Dow Jones Industrial Average (DJIA), is a stock market index representing 30 large, publicly traded companies on the NYSE and Nasdaq.
Established in 1885, it’s one of the world’s oldest and most closely followed indices. While it offers stability and diversification in well-established companies, Wall Street says the DJIA does not fully capture the growth and innovation potential of broader indices like the S&P 500 or the Russell 3000, as per the Wall Street perspective of being all things to all people.
Advantages of investing only in Dow 30 Stocks:
- Blue-Chip Stocks: The Dow 30 comprises large, stable companies with a 10- to 20-year history of strong performance, and most are widely considered relatively safe investments.
- Diversification: Owning a portfolio of ten diversified Dow 30 stocks provides investment across sectors, reducing risk. Noteworthy is that 75% of Warren Buffett’s US$350 billion Berkshire portfolio is invested in five stocks.
- Market and Economic Indicator: The Dow reflects the overall health of the US stock market and economy.
- Liquidity: Dow 30 stocks are highly liquid and allow easy buying and selling.
- Historical Performance: The Dow has historically delivered solid returns, appealing to long-term investors.
Wall Street Warnings:
- Limited Diversification: The Dow 30 is less diverse than broader indices, causing missed opportunities.
- Exclusion of Fast-Growing Companies: It includes stable firms, but you miss out on the growth potential of smaller, more innovative companies.
- Lack of Representation: The Dow 30 represents a small part of the US economy.
- Price-Weighted Index Structure: The DJIA is a price-weighted index comprising 30 companies. A special Dow committee adds these constituents. The S&P 500, on the other hand, is weighted by market capitalization. The DJIA structure leads to index performance distortions.
- Changing Composition: The Dow’s composition changes over time as companies are added or removed based on various factors. This affects long-term strategies.
It’s important to note that Wall Street warnings represent sell-side interests and do not hold true for buy-side investors. Here are some reasons why their warnings should be dismissed:
- Limited Diversification: While it’s not as diversified as a broader index like the S&P 500 (market cap of US$36 trillion) or the Russell 3000 (US$45 trillion), the Dow 30 with a market cap (May 31, 2023) of US$11.0 trillion, still includes enough companies from different sectors to minimize risk compared to investing in a single company or industry.
- Changing Composition: Wall Street claims these changes can disrupt a long-term investment strategy, and investors must stay updated on index changes. However, you are not investing in all the Dow 30, and you have probably not invested in the companies that get dropped from the index every few years as they have been relatively financially weak and operational under-performers.
- Index Structure: The Equal-Weighted Index of the Dow 30 has outperformed almost all major indexes over the long run, so there is nothing wrong with the structure.
- Wall Street’s interests differ from yours: The fact is Wall Street is in business to finance and trade the shares of tens of thousands of companies, and its profitability depends more on that than your need to diversify.
- The Fear Of Missing Out Syndrome: FOMO is the scourge of Wall Street. Rather than helping you meet your valuable goals and objectives, the sell-side’s time is spent creating selling narratives that meet their needs.
- Risk Mitigation: Investors mitigate risks often associated with broader market volatility or fluctuations by selecting only companies with strong fundamentals and consistent performance.
- Investment Focus: Wall Street caters to a broad investor base, while individual investors need a focused investment approach to align with their circumstances.
- In-depth Knowledge: Direct investment in a few individual companies allows for deeper research and understanding, enabling you to make more informed investment decisions.
- Long-Term Focus: While indices like the Dow 30, S&P 500, and Russell 3000 offer broad exposure, their volatility appeals to traders but is off-putting to investors. Concentrating on specific companies allows for a targeted long-term investment strategy tailored to your preferences, objectives, and risk tolerance.
In summary, you can trade an index that covers the entire stock market’s breadth and depth, but in doing so, you are trading a price of assets you do not know the value of or even many of the names. You are trading ETF prices against computer programs hosted on quantum computers managed by the biggest financial services companies in the world whose objective is to profit from you. The only way to mitigate risks and improve an investment portfolio’s stability and growth potential is to invest directly in the equity of individual companies you have deep knowledge of, consider are financially and operationally solid, and meet your personal objectives and risk tolerance.
The bottom line is that the small independent investor Wall Street calls its retail client does not need Wall Street.
