Is the DOW a big sham? (Bu-Bye GM & Chrysler)

[CoffeeCat]

The DOW is comprised of thirty companies. Each day, attitudes about the health of our economy--rise and fall on the behavior of these
companies.

I find it interesting that GM and Chrysler were removed from the DOW (and replaced with Cisco and Travelers). I understand why
GM and Chrysler were booted. Both are bankrupt. Furthermore, the DOW has to be fluid--otherwise Jim's Buggy Whips might still be
a DOW company. This list must change with the times.

However, it bothers me that the failure of a DOW company is just erased--and the failed companies are
replaced with shiny, new, promising replacements. A seamless transition that seems to erase reality.

It just feels Ponzi-scheme-ish. Now, with Cisco and Travelers--the DOW doesn't accurately reflect the downturn
that this economy has made in the past few years.

After all, if our 401ks or other investments included GM or Chrysler--we're living the reality. We took a hit that
we can't erase. We can't run out and say, "Oh Mr. Financial Advisor, we want to replace our mutual fund investments
with stock in companies that didn't tank."

However, the DOW can Band-Aid their losses and hide them---by replacing failed companies.

Is there a disparity growing between real life (and the real losses we poor schleps experience)--and the picture of
the economy painted by Wall Street?

[Taverner]

1. "The Dow" is really only 2 standard deviations of the market as a whole

[phantom power]

2. I think of it this way...

Some amount of replacement over time will always be necessary. Companies and industries rise and fall.

However, it is possible to abuse that, for example by intentionally cherry picking companies to make the Dow look like its performing. My non-professional sense is that there is little or no cherry picking on the Dow, but then again if somebody showed me that there really was, it wouldn't exactly shock me.

[A HERETIC I AM]

3. Chrysler wasn't a member of the Dow 30.

It hasn't been publicly traded for 18 months or so.

Citigroup was the other replaced firm.

However, it bothers me that the failure of a DOW company is just erased--and the failed companies are
replaced with shiny, new, promising replacements. A seamless transition that seems to erase reality.

It just feels Ponzi-scheme-ish. Now, with Cisco and Travelers--the DOW doesn't accurately reflect the downturn
that this economy has made in the past few years.

How do you figure? The DJIA has fallen from the 14,000 level to where it is now and part of that drop is as a result of the falling share prices of GM and Citigroup.

After all, if our 401ks or other investments included GM or Chrysler--we're living the reality. We took a hit that
we can't erase. We can't run out and say, "Oh Mr. Financial Advisor, we want to replace our mutual fund investments
with stock in companies that didn't tank."

There are damned few if any Mutual Funds that invest solely in one sub-sector (Automotive Manufacturers) so the effect of the demise of one issue is mitigated in a broadly diversified fund.

However, the DOW can Band-Aid their losses and hide them---by replacing failed companies.

It doesn't work that way. The average doesn't fall or rise merely because they add or remove a particular company. The 200 + point increase yesterday occurred while GM and Citi were still members, though GM's trading had been halted on the NYSE.

http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

[Junkdrawer]

4. The Dow Jones *Industrial* Average....

Well, Alcoa and Caterpillar are still there, but the other 28, not so Industrial...

[On the Road]

5. This Happens All the Time

Same with the S&P 500. It's necessary to keep up with changing economic sectors.

On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, The Home Depot, and SBC Communications.... On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG. ^Wikipedia

Only one of the original Dow companies (General Electric) is still on the index. The others were:

American Cotton Oil Company,
American Sugar Company,
American Tobacco Company,
Chicago Gas Company,
Distilling & Cattle Feeding Company,
Laclede Gas Light Company,
National Lead Company,
North American Company,
Tennessee Coal, Iron and Railroad Company
United States Rubber Company.

Even for those companies still in business, that's no longer a broad representation of the economy.

[NeedleCast]

6. Kinda, Yeah

It's managed, as you said, but then, a lot of the companies that make it up are nearly interchangable in their overall holdings.

401k (at least those who have any sense) are so diversified that a single company going belly up shouldn't effect the overall performance of the fund much at all.

I don't think it's as much of a sham as you think, as long as you understand that it's manipulated and often makes little or no logical sense. There really are a few simple axioms to keep in mind, and you should, at worst, break even. One of those is that the market rallies on rumor and falls on facts. The market LOVES speculation, HATES facts (often even good ones...as seen recently when many large banks posted better than expected quarters and the market dropped).

[bbinacan]

7. The Dow in 1886

January 2, 1886
Chicago, Milwaukee & St. Paul Lake Shore Railroad Northern Pacific (Preferred)
Chicago & North Western Louisville & Nashville Pacific Mail Steamship
Delaware & Hudson Canal Missouri Pacific Union Pacific
Delaware, Lackawanna & Western New York Central Western Union

A lot of RRs.

[Rage for Order]

8. Not just a sham

But a Sham Wow!

[ohheckyeah]

9. I don't know jack about investing,

but about 2 years ago I moved most of what little bit we had in a 401K to funds I picked. All the money was originally in a fund that invested 71% of the funds in U.S. equities. I picked two funds that 70% of the funds are invested in non-US equities. The U.S. funds yielded 8.1% return. One of the non-U.S. funds yielded 25.82% and the second one 26.19%.

I'd say I made a couple of good choices.

[NeedleCast]

10. Makes Sense

US funds that are part of retirement packages are often safe, blue chip stocks (which GM was considered only a few years ago) while a lot of foreign funds can be moderately to very risky. You did well.

[ohheckyeah]

11. So, do I leave it alone.

Move the rest of the one fund two the other two, or what? Or just guess like I did when I picked them? :-)

[NeedleCast]

12. That depends on several factors

First being how close to retirement you are.

The general rule of thumb here is that the closer you get, the more you need to move your retirement fund money to safer waters.

If you're young, take risks. I'm 35 and got a late start since the first five years of my "career" was in the Army and the military doesn't offer a 501k type retirement package. If things go as planned for the next 20-25 years, my retirement fund should be large enough for me to be done (retire). My 501k (now 403b) got creamed (like a lot of people) when this recession hit but for younger people, that can be a blessing in disguise. I still contribute the same amount, but when share prices are down, that amount buys more shares. So assuming the market goes back, which is a pretty safe assumption, it works out to my advantage.

Second is just how much you're willing to risk. Some people are fine with slow growth across the board. Some people are fine taking very high risk for very high rewards (especially when they're younger).

I think (assuming you're under about 40-45 years old) that you're okay where you are but keep an eye on the international funds because they can tank just as quickly as they went up. Make sure you're fairly diversified (don't put all your eggs in one basket). Finally, (and it seems like you are) pay attention to how your funds are performing. Lots of people have no clue what their 501k is doing. Don't be that guy (or girl).

[ohheckyeah]

13. I'm not young.

I think I'll leave them the way they are now. About 1/2 of the money is in the safer fund.

[NeedleCast]

14. Just keep a close eye on the internationals

A lot of this also depends on how much you're comfortable living on when you retire...or if you plan to retire at all.

Think about it like this...is the return on what you have in safer funds an amount you'd be comfortable living on in retirement?

[ohheckyeah]

15. It's not enough to make a dent in

retirement.

[NeedleCast]

16. In that case I'd roll the dice and keep it just like you have it

Good luck!

:)

[ohheckyeah]

17. Thanks. Might as well.

We'll be taking some out to get us through this time of unemployment but I'm trying to take out as little as possible.

[muriel_volestrangler]

19. You have 2 funds that have gone up over 25% in the past 2 years?

Those would be great choices. I would expect they were highly specialised. Exchange rates may have helped you a bit at times, but on the whole over the past 2 years, most foreign currencies have fallen against the dollar, but just about all stock markets have fallen considerably over the past 2 years. I presume the managers were betting on the markets falling, were they?

[Qot]

18. Even if they did replace failed companies (AIG, GM) that would not subsequently prop up their value