Hulbert: Time in market trumps index selection as Dow marks 130 years

Investment analyst Mark Hulbert has argued that maintaining a long-term position in the equity market is more critical to investment returns than the specific index selected for exposure. Citing the 130-year history of the Dow Jones Industrial Average, Hulbert noted that the longevity of holding stocks provides significant diversification benefits that may outweigh the advantages of holding a diversified portfolio of many stocks for a short period.

The analysis highlights that the Dow Jones Industrial Average turned 130 years old on May 26, providing a data set to examine long-term performance. According to Finaeon’s Global Financial Database, the Dow’s dividend-adjusted annualised return since its creation in May 1896 is 10.4%, compared to the S&P 500’s 10.2%. Hulbert described the performance paths of the two indices over the last 130 years as nearly identical, suggesting that time in the market is a more decisive factor for returns than index selection.

Despite the similar returns, the structural differences between the indices are significant. The S&P 500’s weight is determined by market capitalisation, whereas the Dow Jones Industrial Average is price-weighted, meaning stocks with higher share prices have more influence on the index’s movement. This methodology creates weighting anomalies, such as Goldman Sachs Group having a 12.3% weight in the Dow due to its high share price, which is more than 30 times larger than its weight in the S&P 500.

Hulbert pointed to specific historical decisions by the Dow’s averages committee as potential drivers of divergence that were mitigated by long-term holding. For instance, the committee removed IBM from the Dow in 1939, a stock that would go on to hugely outperform the index until it rejoined in 1979. More recently, Salesforce was added to the index in August 2020 instead of Meta Platforms. Since that date, Salesforce has lost a cumulative 33.9% while Meta has gained 118.3%, illustrating how constituent selection impacts performance.

The price-weighting methodology also leads to distortions following corporate actions such as stock splits. Apple’s 4-for-1 stock split in 2020 reduced its weight in the Dow, meaning its impact on the index’s performance over the subsequent six years was one-quarter of what it would have been had the split not occurred. Despite these structural quirks and the fact that the Dow comprises only 30 constituent stocks, its long-term trajectory has mirrored the broader S&P 500.

Hulbert concluded that investors waste time and resources attempting to identify outperforming stocks unless they hold these positions for many years. He argued that holding one stock for many months can provide greater diversification benefits than holding many stocks for a single month, allowing investors to overcome mediocre stock picks through the virtue of time diversification.

Mark Hulbert is a regular contributor to MarketWatch, where he tracks investment newsletters via Hulbert Ratings. The Dow Jones Industrial Average is managed by an averages committee at Dow Jones, which periodically swaps constituent stocks to reflect changes in the US economy.