MW The stock index you invest in isn't always the most important decision. Here's what matters even more.
By Mark Hulbert
Time in the stock market is more important than index selection - and the Dow's 130-year history proves it
Investors can overcome many mediocre stock picks by holding for the long term.
One of the best lessons investors received when the Dow Jones Industrial Average DJIA turned 130 years old on May 26 was a reminder of why time diversification is so important in the stock market.
I'm referring to the portfolio risk reduction from holding stocks for the long term. Most investors think of diversification in terms of holding dozens of individual stocks, and they're right, up to a point. But what few realize is that holding one stock for many months can provide greater diversification benefits than holding many stocks for one month.
This investment lesson emerges from the Dow's 130-year history because its long-term performance is nearly identical to the S&P 500 SPX, despite major differences in how the two indices are constructed. Since the Dow's creation in May 1896, it has produced a dividend-adjusted return of 10.4% annualized, according to Finaeon's Global Financial Database. The S&P 500's comparable return is 10.2% annualized.
Moreover, as the chart below shows, the paths the two indices have taken over the last 130 years are nearly identical.
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A brief review of some of the differences between the Dow and the S&P 500 helps us appreciate how remarkable it is that their long-term returns are so similar.
The so-called averages committee at Dow Jones periodically decides whether a given stock should be deleted from the Dow and replaced with another stock, and with just 30 constituent stocks the committee's decisions loom large. (Dow Jones is the parent company of MarketWatch.)
Consider the last time stocks were added and deleted from the index, on Aug. 31, 2020. Salesforce (CRM) was among the stocks added, but a Barron's article at that time argued that Meta Platforms (META), the parent of Facebook, would have been a far better choice. Since then, Salesforce's stock has lost a cumulative 33.9% while Meta has gained a total of 118.3% (through May 27, per LSEG). Imagine where the Dow would be trading at today had the averages committee decided differently.
An even more dramatic example of a judgment call is the decision in 1939 to remove IBM $(IBM)$ from the Dow. The stock hugely outperformed the Dow from then until 1979, when it rejoined the index.
See: Why double-digit earnings growth won't stop the next bear market
Unlike the S&P 500, for which a stock's weight is a function of its market cap, the Dow uses price-weighting: a stock's weight in the Dow is determined by its price. So Goldman Sachs Group $(GS)$, by virtue of its high price - just over $1,000 per share - currently has the largest weight in the Dow at around 12.3%, more than 30 times larger than its weight in the S&P 500.
Price-weighting has no end of absurd consequences, not the least of which is what happens when there is a stock split. Consider Apple's $(AAPL)$ 4-for-1 stock split in 2020. Since a split is merely an accounting matter, it has no impact on Apple's importance to the economy as a whole or the stock market in particular. Yet the split reduced its weight in the Dow. Had the company not split its shares, its impact on the Dow overall performance over the last six years would have been four times greater.
These are just a few of the more spectacular consequences of the Dow's construction methodology. If you were unaware of the virtues of time diversification, you would think that both the Dow's and the S&P 500's long-term returns would have hugely diverged. But the opposite is true.
The bottom line: You can overcome many mediocre stock picks by holding for the long term. Investors are largely wasting their time when expending significant time and resources to find stocks they think will outperform the market - unless they hold these stocks for many years.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
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-Mark Hulbert
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(END) Dow Jones Newswires
May 30, 2026 10:58 ET (14:58 GMT)
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