Ask Matt: Do changes to the Dow signal winning stocks?
Q: Since Kraft is being replaced by UnitedHealth in the Dow, should I invest in UnitedHealth shares?
A: Getting added to the Dow Jones industrial average might stroke the ego of the company being added. But it's rarely a source of riches for investors.
Changes aren't very common within the Dow. The last time a change was made to the widely followed market benchmark was June 8, 2009, when network firm Cisco Systems replaced Citigroup.
Prior to that, change came in September 2008 when Kraft replaced American International Group.
In the latest modification, effective Sept. 21, health care company UnitedHealth will take Kraft's place in the Dow.
Does it mean that if UnitedHealth is good enough for the Dow that it's good enough for your portfolio?
Not so fast. Typically, when a stock is added to the Dow, good things don't necessarily follow for the stock.
Consider Cisco, the last stock that was added. Shares of Cisco were trading for $19.87 a share the day they were added to the Dow. Since that time, shares of Cisco have fallen 4%.
During that same period, the market, defined by the Standard & Poor's 500 index, has rocketed 56%, and that doesn't include dividends.
It's a reminder that just because a stock is added to the Dow doesn't mean it's going to be a winning stock.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz.
