The Dow Jones Industrial Average is Making Record Highs – What About My Portfolio?

A 60-second read by Anthony Benante: Comparing the Dow Jones Industrial Average (DJIA) to a specific investor’s globally-diversified portfolio is like comparing apples and oranges. Though there may be many more differences, we highlight a few here to consider. The DJIA consists of 30 large U.S.-based companies representing all industries except transportation and utilities.  A globally-diversified portfolio should be tailored to a specific investor’s profile, and may have exposure to well over 500 different companies (through Exchange Traded Funds and mutual funds) in all industries, as well as possible exposure to fixed income and other financial instruments. The DJIA is a price-weighted index, not market-cap weighted. This means that the index is constructed with companies with higher stock prices, such as those in August of 2017, like Boeing (BA), Goldman Sachs (GS) and 3M Co. (MMM). These companies carry more weight than those with lower stock prices, like Pfizer (PFE), Cisco (CSCO) and General Electric (GE), regardless of the total market value of each company.  So, if a few of the high-priced stocks are doing well, the index can do well compared to a diversified strategy. A good globally-diversified strategy is typically constructed for a specific investor with a unique profile.  The strategy should identify a risk profile and attempt to maximize return within that risk profile, while helping the investor achieve their financial goals. Finally, the DJIA typically only makes changes based on corporate actions and market developments while a globally-diversified strategy should make changes specific to the investor – when investments move outside of targets (rebalance), underperform (choose a better performing peer investment) or if there is a change in the investors specific profile (change the risk profile).

So when you hear about the performance of the DJIA, know that you are hearing about the performance of a few “popular” U.S. equities.  For a more personal understanding of your investments, you should understand the risk profile of your strategy and understand how your investments are helping you to achieve your long-term financial goals.

Please reach out to your Baron Team if you have any questions.