Category Archives: diversification

Did BusinessWeek Really Say That?

Posted on August 17, 2019 by | Leave a comment

In a recent article, Bloomberg BusinessWeek referred to their “The Death of Equities” article that was published on August 13, 1979.

Bloomberg owned up to an article that they didn’t have much to do with and used it as a point of reference for the market’s change since 1979.  It seems that very often, bad calls are buried when they can be used as lessons.  Good job Bloomberg BusinessWeek.

image

What stood out to us about the article is the reference to the performance of the Dow Jones Industrial Average at +9,000% compared to the S&P 500 Index at +7,000%.  Many contend that the Dow Jones Industrial Average is an outdated index and that the S&P 500 is “better” because of the broader diversification being representative of the U.S. economy.

Our view has always been, go with the index that has the longest history of data.  In this case, the Dow Jones Industrial Average has published record of data going back to 1896 while the S&P 500 goes back to 1957. Also, greater concentration does better than broad diversification when selecting within the “blue chip” category of stocks.

See Also:

Leave a comment

Posted in Death of Equities, diversification, Dogs of the Dow

Diversification: Dow 30 and the Others

Posted on October 24, 2018 by | Leave a comment

It was another tough day for the market, with broad based declines in every direction.   On the diversification front, it was another day in which the Dow Jones Industrial Average lost less than the many broader indexes like the S&P 500 and Russell 2000.

image

Diversification is intended to reduce loss in exactly the kind of market we’re experiencing.  So what’s going on?

Leave a comment

Posted in diversification

Diversification: DJIA vs. S&P 500

Posted on October 11, 2018 by | Leave a comment

The long-standing view is that being diversified is better for the purpose of limiting losses.  the data from the most recent decline from the peak in the market confirms, for now, that diversification doesn’t matter.

DJIA S&P 500
1 day -0.94% -1.10%
2 days -4.06% -4.35%
3 days -4.27% -4.49%
4 days -4.12% -4.52%
5 days -4.77% -5.05%
6 days -5.48% -5.83%

As of October 11, 2018, and going backwards to October 3, 2018, the Dow Jones Industrial Average (DJIA) and S&P 500 have declined.  However, the extent of the decline defies the norms of diversification and concentration in investments.

image

In all scenarios, the Dow Jones Industrial Average declined less than the S&P 500.  As an example, from the October 3, peak to the present, the DJIA declined –5.19% while in the same covered period, the S&P 500 declined –5.56%.

Conventional wisdom says that concentrated portfolios should rise more and fall more than diversified portfolio.  In theory, both the DJIA and S&P 500 are comprised with the same high quality stocks.  Therefore, the comparisons is supposed to be like-for-like.

image

This brings us back to the October 9, 2007 to March 9, 2009 period, when the Dow and S&P 500 peaked and troughed, respectively.  Strangely, the more concentrated Dow Jones Industrial Average, counter to the conventional wisdom, declined less than the S&P 500.  The 3% difference seems to be small, however, the theory of diversification and its failure, suggests that the amount is huge.

Leave a comment

Posted in diversification, DJIA, S&P 500