Scalper1 News
Summary The component of the Dow Industrials, as a group, has a proven successful investment over a century. Optimizing long term returns may be achieved by dollar cost averaging and dividend reinvestments. A steep stock market selloff will be an opportunity for those just entering into equity investing. Equity markets are hardly predictable. At times they’ll relentlessly trend upward, fundamentals notwithstanding. At other times they’ll cascade downward like an avalanche, trashing every investor who tries to call a bottom. In the short term, price fluctuations border on chaotic. However, if an investor takes a moment to stand back and look at equity market behavior over many, many decades, it’s sure to boost confidence. Here’s a price history of the Dow Jones Industrial Average (DJIA) from 1900 until August of 2015. Only a very few of the many notable historic, economic, national and global events are highlighted. There are numerous recessions of varying degrees, panics, wars, market crashes. There simply isn’t enough room to point out every headline event which had occurred over 115 years. Not highlighted are dozens of revolutions, coups, cold war standoffs, massive above ground thermo-nuclear tests and unimaginable natural disasters. The Dow simply shrugged it all off. (click to enlarge) Depending on your age, you might imagine investing in the Dow Jones Industrial Average when you were just starting out. To put a little icing on the cake, suppose further you’ve reinvested all your dividends. There are several “Dow Jones Return Calculators” which may be found with a little browsing. A few example returns are noted in the table below. Time Period Return (Inflation adjusted) Annualized 1960 – 2014 2069.783% 5.754% 1970 1608.424% 6.510% 1983 1317.406% 8.639% 1987 511.084% 6.678% 2002 98.870% 5.431% 2009 84.618 10.759% Calculator at “Don’t Quit Your day Job”.net The point being that in spite of wars, recessions, disasters and market debacles, a consistent, steady and disciplined approach to investing is a proven road towards building a substantial nest egg. To be sure, the road is not paved smooth. However, as long as the investor sets a minimum monthly or quarterly allocation, called dollar cost averaging, and reinvests the dividends, the end result will be well worth the effort. New investors are fortunate because it hasn’t been until relatively recently when an individual investor was able to invest in an entire index, let alone with deeply discount commissions and fractional shares. ‘Back in the day’ commissions may have cost upwards of $150.00 for a small ’round-lot’. ‘Odd-lots’, (less than 100 shares) or fractional shares were handled by specialized brokerage houses for an additional fee, of course. Those days are long gone! Now, with deeply discounted commissions and a technology with which round lots, odd lots, fractional shares are traded with a single mouse click, the door is open to everyone with the ambition to go-it-alone. Further, automatic purchases and automatic dividend reinvestments are pretty much a standard option and make the entire process ‘forget proof’. It should be noted that the Dow Jones Industrial Average was created in 1896 in order to provide investors with a reasonably accurate measure of the overall market direction and it served well for nearly a century. There are only 30 members of ‘the Dow’ industrials and although it’s the market number that catches everyone’s ear, it is no longer the very best indication of equity market ups and downs. However, what it still does represent is an exclusive club of well-established blue chip American companies. It is the ideal venue for those just entering the market that might yet to have gained the experience and understanding of market analysis or the implications of macroeconomic data. In other words, an investor may start with very little experience or knowledge with the Dow. In fact, there is a straight forward, plain vanilla Exchange Traded Fund (ETF) offered by State Street Global Advisors : the SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ). DIA sometimes called the ‘Dow Diamonds’: … seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average… The Dow Jones Industrial Average (DJIA) is a price weighted average. This means that the price of each component is added up and then divided by the number of components. Now, to be sure, changes were made as time went by and companies were removed or added as their relevance to the economy changed. In order to preserve the continuity of the average, the Dow divisor must be adjusted along with new components. The current divisor is 0.14967727343149. Indeed, the sum of the prices of each component as of the close of trading on Friday, September 4th works out to 2410.16. Dividing that sum by the divisor results in: (2410.16)/ (0.14967727343149) = 16,102.386; precisely Friday’s closing average! According to the prospectus the weight of each stock in the fund’s portfolio ‘substantially corresponds’ to the weight of each Dow component; the fund distributes dividends monthly. The fund itself first traded in January of 1998. Its Gross Expense ratio is low, at 0.17%. The fund notes 31 holdings, the Dow 30 plus a cash position (as do most funds). It might seem frivolous to the experienced investor, but for the sake of completeness each component is tabled below and since price matters in this average, the September 4th closing price is included. Name Close, 9-4-2015 Name Close, 9-4-2015 Name Close, 9-4-2015 Goldman Sachs (NYSE: GS ) $108.38 McDonald’s (NYSE: MCD ) $94.85 JP Morgan Chase JPM $61.50 IBM (NYSE: IBM ) $143.70 Johnson & Johnson (NYSE: JNJ ) $91.13 Merck (NYSE: MRK ) $51.59 3M (NYSE: MMM ) $139.84 United Technologies (NYSE: UTX ) $90.68 Du Pont (NYSE: DD ) $48.60 Boeing (NYSE: BA ) $129.76 Chevron (NYSE: CVX ) $76.67 Verizon (NYSE: VZ ) $44.82 Home Depot (NYSE: HD ) $114.42 American Express (NYSE: AXP ) $74.08 Microsoft (MST) $42.61 UnitedHealth (NYSE: UNH ) $112.36 Caterpillar (NYSE: CAT ) $73.10 Coca-Cola (NYSE: KO ) $38.52 Nike (NYSE: NKE ) $109.69 Exxon Mobil (NYSE: XOM ) $72.46 Pfizer (NYSE: PFE ) $31.37 Apple (NASDAQ: AAPL ) $109.42 Visa (NYSE: V ) $69.16 Intel (NASDAQ: INTC ) $28.52 Disney (NYSE: DIS ) $100.97 Proctor & Gamble (NYSE: PG ) $68.76 Cisco (NASDAQ: CSCO ) $25.52 Travelers (NYSE: TRV ) $97.76 Wal-Mart (NYSE: WMT ) $63.89 General Electric (NYSE: GE ) $24.00 Closing Prices Dow Components, September 4th CNNMoney Since this is a price weighted average, it’s interesting to see at a glance heaviest to least weighted by price in the chart below. (click to enlarge) ( Data from State Street Global Advisors) It’s also worth noting that the DJIA yield is 2.69%, the fund yield is 2.48% and the fund yield less expenses is 2.46%. Since its inception in January of 1998, the fund has an annualized yield of 7.08%. As mentioned above, the fund closely replicates the DJIA; hence the sector allocation of the fund demonstrated in the chart below is nearly identical to the sector allocation of the DJIA. The fund’s net assets are approximately $11 billion. The current index P/E is 15.44, about average and the price of the index is 10.15 times its cash flow. The ETF is currently trading at a discount to its Net Asset Value; i.e., the ETF market cap is slightly less than the Net Asset Value (NAV) of its holdings. The key point to keep in mind is that the Dow Jones Industrial Average no longer serves as the ‘must have market indicator’ but it does reflect the essential composition of the U.S. economy by premier U.S. companies in each market sector. Recently, equity markets have been unraveling because of uncertainty in global growth expectation. For those who, in the course of the day might happen to catch a word about the “Dow Industrials” having lost some frightening number of ‘points’, and hearing market pundits casting dire warnings about days to come, then that should serve as a signal that this is the day to start investing for the future. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: CFDs, spreadbetting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk. Scalper1 News
Scalper1 News