The Benchmarks Lie. Here’s How.

The benchmarks lie. Many investors, new and experienced alike, are intent upon “beating the Dow” or “beating the S&P,” rather than seeing their capital increase over time. It isn’t that difficult to beat the benchmarks. We’ve done it over 15 years from 1999-2014, and this year, the markets, so far, are down 6% to our 1%, so we ?hope to keep that trend alive.

On the other hand, for investors ?who place their faith in buying only companies that are in the benchmarks often find ?it is difficult to beat the indexes. That’s because “the benchmarks lie.” Every time a company disappoints the keeper of these benchmarks, the S&P Dow Jones Indices (a McGraw-Hill Financial subsidiary), they boot it out of the index and replace it with something they consider more “representative.”

I don’t believe it is a coincidence, however, that “representative” usually equates to rising relative momentum, making the index performance look considerably more attractive – although that index may have a completely different composition than the one you bought before all their changes. As for the companies booted out, they are still in business, but if you bought a mirrored portfolio of those 30 stocks, you own the same 30, though the index and its ETF? clones own a very different index – and not because the? component companies went out of business or failed to meet regulatory requirements.

Assuming the S&P Dow Jones Indices are correct in their momentum assessment, the results are regularly skewed upward. So, if you obsess over “why didn’t the 30 Dow stocks in my portfolio keep up with the Dow Jones Index?” well, in November 1999, did you toss Chevron (NYSE:CVX), Goodyear (Nasdaq:GT), Sears (Nasdaq:SHLD), and Union Carbide out of your portfolio and replace them with Home Depot (NYSE:HD), Intel (Nasdaq:INTC), Microsoft (Nasdaq:MSFT), and SBC Communications (which, a few years later, acquired/became AT&T)? The S&P Dow Jones Indices? did.?