SHOULD WE BELIEVE THE DOW?
by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Florida
BOCA RATON, Fla., Jan. 11, 2005 -- Headlines proclaimed tht happy days must be here again, because achieving the 11,000-point mark in the Dow Jones Industrial Average - the "Dow," for short - puts the less-than-significant index right where it was, oh, let's say five and one-half years ago.
The Dow Jones Industrial Average hit a high of 11,700 six years ago and has dwelled in the doldrums of investor despair ever since.
Ironically, and with some satisfaction for many professional portfolio managers, the sideways DOW came at a time when pop investment culture told people that throwing money at a un-managed "index fund" would out perform professionally-managed money.
For year-end 2005, the Dow lost - as in minus, negative, down - 0.61 percent.
The more important indicator, the S&P 500 Index, was up approximately three percent.
The smaller-cap and generally more speculative NASDAQ finished up only 1.37 percent.
Last year, then, an investor's willingness to take a bit more risk paid off, but not by much.
In reviewing some last-quarter results by some money managers with whom I work, including some for whom I admittedly manage money, I found the Lincoln Financial Group funds a fairly good surrogate for the conservative, long-term investor.
One typical trust account finished the year up 9 percent, with the final quarter of the year up 2.035 percent. Some asset allocation shifts at the end of the third quarter emphasized the better blue-chip issues, particularly British ones, and some Western European stocks, but the experience proves that an understanding of asset allocation can help us outperform many indices.
Without going into precise percentages (since every client's needs and goals are different), the Lincoln Financial portfolio allowed the money manager to have the client invested in a portfolio consisting of the following mutual funds or their "sub-account" annuity clones:
AFIS Growth; AIM International Growth; AIM Premium Equity; Delaware High Yield Bond; Delaware U.S. Growth; Delaware U.S. Value Series; Fidelity Equity-Income; Fidelity Overseas; Lincoln National International; MFS Total Return, and Neuberger Berman Midcap Growth Fund.
By monitoring the funds, and anticipating broad market trends instead of reacting to CNBC, Fortune, or Money Magazine, the trust account mixes and matches broad sectors.
The results for the past three years (the fund started in the current doldrums) was an annual average increase of 8.87 percent per year. By the way, this is not a "total return" account that reinvests all capital gains and dividends, but one that sends out income checks for living expenses; it is an actual, living, breathing example of what can be and is accomplished by savvy and serious students of investing working with prudent professionals.
The main thing that is wrong with the Dow Jones Industrial Average as a market guide, is the Dow itself.
The Dow once again includes the name AT&T, but it has little to do with the AT&T of a hundred years ago. It was added a few months ago because former Baby Bell and chunky regional Bell, SBC Communications, purchased what was left of the old AT&T (which had split into four companies), and decided that the "AT&T" name and logo was a better marketing tool than "SBC."
When the Dow index stocks go down, get bogged down, or become a drain on the index, the Dow Jones (owned by the Wall Street Journal) board throws them out, so the 11,000 DJIA of 2006 does not include what was once the largest private landowner in the world, International Paper. A few years ago, with its stock declining, they dumped it from the Dow Jones Industrial Average.
Both Microsoft and Intel are still in the "new" DJIA, although they are more high-tech than heavy "industrial" which was key to the index for a century. Also, both are listed on the Nasdaq "over-the-counter" exchange, avoiding the traditional role of New York Stock Exchange firms that make up the Dow.
DJIA guardians conveniently include retail giant Wal-Mart, which boomed for 25 years but dumped a retail mainstay, Sears, when the latter fell from favor and later merged with bankrupt discounter K-Mart.
Is the cherry-picking DJIA really a good market index, when it is over-weighted with pharmaceutical and health related products of Johnson & Johnson, Merck, Pfizer, and yes, even Proctor & Gamble? And when a lawsuit or scandal hits Merck and filters into the rest of the sector, is that a real reflection of the overall "market?"
Inclusion in the Dow Jones Industrial Average is a complex formula of market cap, trading volume, sector weight, and fancier stuff than I can fathom.
So, when we eventually go to a "new market high of 11,800 on the Dow!" - even though it took six or seven years to get there - and Dow components such as General Motors do the bankruptcy-avoidance cha-cha, just read the names of the 30 DJIA stocks below, and decide how "industrial" they really are:
AT&T; Boeing; Caterpillar: Citigroup: Coca-Cola; DuPont; Exxon
Mobil; GE; GM; Hewlett-Packard; Home Depot; Honeywell International; Intel; IBM;
Johnson & Johnson; JP Morgan Chase; McDonald's; Merck; Microsoft; Pfizer;
Procter & Gamble; United Technologies; Verizon; Wal-Mart and Walt Disney Company.
Veteran AR Correspondent Mark Scheinbaum is Chief Economist at Kaplan & Co. in Boca Raton.