The Dow Jones Industrial Average (DJIA) is one of the most prominent stock market indices in the world. The “Dow” consists of 30 large companies that are publicly owned in the United States and are viewed as indicators of the overall stock market and U.S. economy. Investing in a vehicle that tracks the Dow (or its individual components) may be a good investment choice for both novice and seasoned investors. Here we will take you through the key steps and factors to consider when investing in the Dow.
The Dow is a price-weighted index. In other words, stocks with high prices have a greater influence on the index performance. This distinguishes it from other indices like the S&P 500 which are market cap weighted. The 30 companies that make up the Dow are market leaders in their fields and include familiar names such as Apple, Microsoft, and Coca-Cola.
This chart tracks the Dow Jones Industrial Average Price Index. Annotations for select major events are included.
Why Invest in the Dow?
Stability and Reliability: The Dow is generally less risky than other segments of the market because the constituent companies are large cap, well-funded operations with a proven track record.
Diversification: The Dow contains firms from different industries, which provide investment diversification.
Long-Term Growth: The Dow has a good long-term track record and can be used for retirement and wealth accumulation.
How to Invest in the Dow Jones Industrial Average:
1.) Purchase the Dow Stocks
One way to invest in the Dow is by buying stock in the companies that make up the index. Keep in mind this option would be time-consuming and requires constant maintenance.
2.) Exchange-Traded Funds (ETFs)
An alternative is to buy an Exchange Traded Fund that follows the Dow Jones Industrial Average. The most popular Dow-tracking ETF is the SPDR Dow Jones Industrial Average ETF (ticker: DIA). An ETF provides the 30 Dow stocks in a single investment, and it is easy to manage.
3.) Mutual Funds
There are some traditional mutual funds that track the Dow Jones Industrial Average as well. However, you would probably be better off choosing an ETF due to their lower expense structure. (You could save 1% or more per year by using the ETF.) Since the fund is simply replicating an index, the portfolio managers’ stock picking expertise (a key for traditional “40-Act” funds) is not a factor.
Steps to invest in the Dow:
1.) Open a brokerage account:
If you want to buy stocks, ETFs, or mutual funds, you will need to open a brokerage account. There are several user-friendly online brokerages with low fees and extensive research capabilities, such as Schwab, Fidelity, and E*Trade.
2.) Fund your account:
After you have opened your brokerage account, you will need to fund it. Most brokerages offer online transfers from your bank account, so it is easy and fast.
3.) Choose your investment:
Determine whether you wish to purchase individual stocks, ETFs, or mutual funds. For most investors, ETFs offer a combination of simplicity and diversity.
4.) Place your order:
On your brokerage platform go to the search bar and type in the ticker symbol of the investment you have chosen. Check the price, decide on the number of shares you want to buy, and place your order.
5.) Monitor:
Periodically revisit your investment to check if it meets your financial objectives.
Conclusion
Diversifying your portfolio with the iconic Dow Jones Industrial Average could be a good long-term investment. Whether you decide to invest directly in Dow stocks or in a Dow ETF, remember this is only one part of building a long-term growth portfolio.