31 Mar Should I buy Dow stocks?

Q. If a stock gets added to the Dow, is that a good reason to buy? — Learning

A. For the uninitiated, the Dow, or the Dow Jones Industrial Average, is an index of 30 large-cap companies.

Typically a stock will perform well leading up to its addition the Dow, said Brian Power, a certified financial planner with Gateway Advisory in Westfield. But generally, that same stock typically has bad performance immediately following its addition to the Dow.

“So if you’re looking for instance gratification from the stock, it most likely won’t happen,” he said.

Because the Dow reflects the top 30 U.S. companies across various industries, owning a stock in the Dow means you are investing in a category leader and a very solid company financially, Power said.

“That is more of a `good reason to buy’ a stock than the fact it was added to the Dow,” Power said.

In addition, because these are top companies and many are household names, many investors — both retail and professional — will hold these stocks in their portfolios, Power said.

“That can create demand for the shares of these companies which could push up their prices in the long run,” Power said. “The other benefit of being a household name stock is that investors are usually not fast to sell them when markets get rocky so they may hold up very well in down markets.”

Unless you’re planning to hold any stock for a longer period of time, Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton, says he’s not a fan of individual investors buying individual stocks.

“You buy a company because it is profitable, it has good management and over time, it should appreciate,” Lynch said. “The fact that it is on the Dow is good, but generally individual stocks are a hit or miss.”

He said he’d rather see you buy an index fund that tracks the Dow, which he thinks would give you better results.

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This story was first posted in March 2016.