III. Dow Jones Global Index

The Dow Jones Global Indexes (DJGI) offer a comparison of stock market performance around the world, computed in a common currency (US dollars). I was surprised to see a graph of October 15/99 figures where the United States is significantly ahead of the other 11 countries represented. Upon closer inspection of the numbers used, there is a difference in the benchmark used for the United States.

The indexes are calculated using a base number of 100 as of December 31, 1991. But for the United States, the base starts much earlier: June 30, 1982. No rationalization exists within the articles I have read to explain why the DJGI for the U.S. was not recalculated when the international benchmarks were added. I will do so here, and then comment briefly on the usefulness of indexes in portfolio performance evaluation.

Reading the chart published in the National Post, the U.S. appears to be approximately 1175. This provides a growth rate of (1175 - 100) / (1999 - 1982) = 63.2353 units per year (assuming a constant growth rate year over year)

Casting the data to 1991, the U.S. index would have been 100 + (63.2353 * (1991 - 1982)) = 669.1177 in December 1991, when the rest of the world was set to 100. (The actual index value was not available at submission time.)

If the U.S. had been re-set to 100 along with the other countries that were assigned to the DJGI, its index would now be: (669.1177 / 100) = (1175 / x), x = 175.6044 = DJGI for USA.

Returning to the charted countries, Switzerland's DJGI at 375 now becomes the leader of the pack. The U.S. would be edged out by Spain, Brazil, Hong Kong, and -- by a whisker -- Canada.

Does that mean investors should start pouring their money into Swiss chocolate and watch companies, ignoring the U.S. and other countries? Not at all. Investing in the stocks that make up the DJGI for any country (or the World Stock Index, a composite of DJGI) may not be the ideal portfolio in all cases. Each investor needs to have a sense of her/his tolerances for risk, as well as expected returns. As the investor's financial needs and expectations changes, so should the portfolio be revisited to reflect that. The components need to be chosen not simply to beat an index, but to reflect the fundamental values of the investor. And if an industry benchmark does not relate to the portfolio and the philosophy, perhaps it should not be used.

After analyzing the DJGI, I would not be inclined to use it in any comparison that would include both U.S. and international data. From the extremely few Internet references to DJGI found, others tend to agree.