Would investing equally in all 30 companies which comprise the DJIA net the same performance as the DJIA?

Question

I'm new to investing, so I'm hoping someone could clear this up for me. As I understand it, the Dow Jones Industrial Average (DJIA) comprises of 30 major American companies. Let's say, hypothetically speaking, that on January 23rd, 1976 I invested $30,000 ($1,000 each) to all of the companies listed within the DJIA. At the time, the value of the DJIA market index was 953.95. Currently, even as it is plummeting, the DJIA has a value of 15,748.01 which is an increase of approximately 1550%. Assuming that I kept track of my investment and exchanged stock in companies leaving the DJIA for companies joining the DJIA, would my initial investment now have a value of about $495,250 (that same percentage increase)? Or am I missing something?

Assuming that I calculated those numbers correctly, is this gain approximately better, equal to, or worse than an average investment for that timespan?

Answer 1

DJIA is a price weighted index (as in the amount of each component company is weighted by its price) and the constituents change occasionally (51 times so far). With these two effects you would not get anything like the same return by equally weighting your holdings and would have to rebalance every so often. Note that your premise was most obviously flawed thinking the number of near bankruptcies there have been in that time. More details of the differing make-ups of the index are available on Wikipedia. When you ask about the "average investment" you would have to be a lot more specific; is it limited just to US shares, to shares, to shares and fixed income securities, should I include all commodities, etc.

see also What's the justification for the DJIA being share-price weighted?

Answer 2

MD-Tech's answer is correct. Let me only point out that there are easier ways to invest in the DJIA index without having to buy individual stocks. You can buy a mutual fund or ETF that will track the index and your return will be almost identical to the performance of the underlying index.

It's "almost" identical because the fund will take a small management fee, you will have to pay annual taxes on capital gains (if you hold the investment in a taxable account), and because the fund has to actually invest in the underlying stocks, there will be small differences due to rounding and timing of the fund's trades.

You also ask:

Assuming that I calculated those numbers correctly, is this gain approximately better, equal to, or worse than an average investment for that timespan?

While people argue about the numbers, index funds tend to do better than average (depends on what you call "average", of course). They do better than most actively managed funds, too. And since they have low management fees, index funds are often considered to be an important part of a long-term investment portfolio because they require very little activity on your part other than buying and holding.