Carbon is always carbon but the Dow Jones isn’t your father’s Dow Jones (or even yours of 10 years ago)

This is for those chemists who still have jobs and are thinking of investing for retirement (when they aren’t looking over their shoulder to see just how secure their job actually is). A side effect of the quantization of atomic energy levels, is that they are exactly the same for each isotope of a given element, depending only on nuclear mass and charge. This means that carbon 12 is the same everywhere.

Not so the Dow Jones (Industrial Average). The start of a new decade always brings forth comparisons with times 1, 2, . . , n decades ago. Well, the DJIA is around 10K now and was basically that in Y2K. But think a bit. GM, Citigroup, AIG were all in the Dow back then. Neglecting inflation (which you really can’t do), if you adopted a buy and hold strategy on the 30 components of the DJIA, you would have to have sold them on the day they left the averages, and used fresh money to buy Travelers Cisco systems and Kraft foods which replaced them. I don’t know the numbers but it’s likely you would have had to shell out a fair chunk of new money to buy them. I think you have to subtract both the losses sustained and the new money you had to put up (minus what you had left after the losses) from the current DJIA to see what buy and hold really cost you.

The hooker of course is Chevron (which was in the DJIA at the beginning and the end, but which was dropped from ’03 to ’08, a time when it more than doubled).

I asked my cousin (who works for Fidelity) about this. He hadn’t heard of this particular idea, but will look it up and report back. My guess — without allowing inflation, and not knowing the answer — you’d have to have come up with about 10% of the capital of the current DJIA to buy the new stuff. What’s yours?

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  • yinvestor  On March 14, 2010 at 11:03 pm

    True to a certain point. Companies switch from different indexes because of many reasons, some because of basic reasons such as the value of their assets as a company has gone down, and past the required limit to be a part of a certain index. Like a small cap company moving from the Russell 2000 index(All small cap) to the S&P 500 because of growth. The reverse can happen as well. Doesn’t happen much, but it does happen. That’s why it’s so important to follow up on your investments regularly so your money you put into it doesn’t cause large losses.

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