One feature of the Dow Jones Industrial Average is that when a company is doing poorly, it is removed from the average and replaced by one that is doing well. [1] If AIG, Honeywell, Eastman Kodak, Sears Roebuck, etc. were still in the basket, the average would look different.
If a person could just swap out losing stocks for winners without realizing losses, everyone's investment could be above average too.
This is the case of most market cap indices. There is no problem with that unless the history is revised. You could replicate the same performance in your own stock account. (Not sure what you mean by "without realising losses"?)
Yes, so you should not allocate the $400 equally across the shares to match the performance of the index. You should buy an equal number of shares of each stock. It may not be a greatly constructed index by modern standards but to my understanding you can in theory get the same performance yourself.
If this was a new rule change your point would be valid. It's fair to consider that but you'd need to adjust all the previous data points to reflect those swaps as well.Why not just compare a larger market pool?
Since the first time one company replaced the next, it has always been the case that the performance of the Dow Jones Industrial Average cannot be replicated by an individual investor. While it may be a useful model, it is actively engineered to keep going higher.
The point being raised is that to "hold the exact same thing it does" actively costs money on an ongoing basis (even before transaction costs!) as you need to sell cheaper stocks to buy more expensive ones.
Surely this is (ignoring transaction costs) reflected in the index performance already. If you sell and buy at the time (and price) of the index you will match the performance. This is not unique to DJIA by the way.
Planet money ran a typically excellent episode on why the Dow is a terrible mechanism for measuring the health of the economy. About the only redeeming feature it had was the length of time it has been running allowing it to be used to compare the state of the economy going back > 100 years.
Much has been made of inequality recently. If a rich person makes N times as much a poor person but doesn't consume N times as much, they'll tend to park their excess income in financial assets. So if money's trickling up to the rich faster than new investment opportunities arise, then the rich people will have more money to bid against each other for assets like stocks. It's easier than ever to trade stocks and there's more and more information about it, meaning more and more people are investing in businesses. The US trade deficit means there's more foreign capital inflow, which is propping up asset values as well, not just stocks but real estate too.
I suspect QE might play some role in stock market prices too, the Fed's been printing an awful lot of money (although a lot of it's been used to shore up bank balance sheets rather than being used to buy stocks). Also, interest rates have been low for a long time. Meaning money that used to buy bonds is buying stocks instead, which pushes up the price of stocks. And now that the Fed's thinking about raising rates, there may be something of a rush to get out of bonds before it happens.
My bearish instincts (not strongly founded in anything, I'm not a full time trader):
All the money printed in QE needs to be parked somewhere. There aren't that many ways to invest money now, and the stock market offers some protection against the dollar crashing (not as good as gold, but gold does not yield divideds).
One likely possibility is mention of this presidential administration changing US corporate taxation to something more focused on capital flow across borders. It's in some ways similar to a VAT- a lower possible rate, but closing loopholes that strand revenues overseas, and eliminating almost every incentive for corporations to domicile offshore or adjust the books so that US taxes are avoided.
One aftereffect of this policy, which has its fans on both sides of the aisle, is the prospect of not so much a stronger dollar, but far weaker currencies for countries that derive their survival on multinational corporations taking advantage of the current US corporate tax system.
As a result, you can still either invest in stock in XYZ in, say, Honduras, or, own stock in the US fortune 500. As many look to the future, the better, safer bet is looking more like the latter than it used to.
2 things I can think of - investors (= people who buy stocks on the market) are enthusiastic about the recent changes in the government from an economy stand point.
Then the state of the current economy after the previous government. The FED feels confident enough about the recovery since 2008 and will raise its rate significantly. This alone will create an inflation. The US dollar will raise, mortgage rates will raise, etc.
People are bull for sure because they think short terms. They've been holding a lot these last 2 years since people were affraid of an eventual collapse of the market (bubble). Which never happened. BTW - Warren Buffet is %100 bull. That tells you something. I personally believe that the next year or so will be bull for sure unless someone crazy decides to attack North Korea or Iran :)
The market broke out both from promises of massive spending from Trump, and from expected interest rate increases that drives the dollar higher - drawing foreign money into the US (plus foreign economies are not doing well).
It's not cheap but not at bubble levels either. It doesn't mean it won't get cheaper or will grow to bubble levels. There is a probability for everything.
The NASDAQ is over 5,000 now, but it was 5,000 17 years ago in the year 2000. Think about what has changed between now and then. Google barely existed, Facebook didn't exist, Amazon was an online bookstore. Apple was struggling and the iPhone and iPod did not exist. Now these are the largest companies in the world. We got people working on self driving cars and going to Mars. These companies are making real money now. If anything, stocks should be higher.
p/e ratios were on the high end of normal and the low end of bubbly before election day.
The rise in prices since then is consistent with increases that could be seen in earnings due to tax cut and other fiscal stimulus.
There has always been the kind of rich person who gets the hot for Republicans, and that kind of person could be buying stocks. That kind of person though is not a paragon of good judgement. (Ex. They though Jeb Bush was a viable candidate.)
If a person could just swap out losing stocks for winners without realizing losses, everyone's investment could be above average too.
[1]: https://en.wikipedia.org/wiki/Historical_components_of_the_D...