Emulating the Dow with individual stocks

This describes basically how the average is constructed. Why would you want to do so? If you're really keen to own the index, there is an ETF for it.

Brian

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Buy one share of each dow stock. That's about $1130. So divide your $X by $1130 and that's how many shares of each. About. The DOW is a price-weighted index. Joe

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

The index is simply the prices of each of the stocks in question added together and divided by a fixed number. Unlike market-cap weighted indices, the DJIA was built for simplicity and speed of computation (in an era before digital calculators).

At first, it was just the simple average price of the shares. As stocks are added, removed, split, etc, the divisor gets updated to maintain continuity.

But in the end, it's simply proportional to what you get by just adding up the price of one share each of each of the companies in the index.

You can track that by simply owning the same number of shares of each of the companies in the index.

As of a few minutes ago, the sum of the share prices of the 30 stocks in the index is 1080.21. If you bought 100 sh. each of those 30 companies, of course, you'd have to spend about $108,000 (plus 30 commissions). But the value of that portfolio would track the index very well.

(The current divisor is approx 0.123 and if you divide that 1080.21/0.123 you see you get a number pretty close to where the DJIA was a little while ago.)

Yahoo lets you download the list of components as a handy spreadsheet:

Or you could by the DIA, which is an ETF which does just the same thing. One transaction, lots less for you to manage and track, but ongoing 0.14% management expense ratio. (not that it costs much to manage that portfolio).

too simple, no?

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.

Thanks for all the replies. Yes I am aware of DIA.

Don't know if it makes sense, but I was thinking of picking only specific companies from the Dow but weighting them similar to the index.

Anoop

-------------------------------------- Misc.invest.financial-plan is a moderated newsgroup where Moderators strive to keep the conversations on-topic for financial planning. Other posting guidelines include a request for brevity and another for trimming posts to which we respond. For all of the other tips and suggestions, see "FROM THE MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the Newsgroup.