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Changes in the Dow: Big Headlines But Little Impact

Changes only come to the Dow Jones Industrial Average every few years, so they're bound to make waves when they happen.

But at a time when diversification is widely considered the lynchpin of a successful portfolio the time also may be coming when a narrow look at 30 stocks that aren't even necessarily industrial in nature is increasingly irrelevant.

The New York Stock Exchange, downtown Manhattan.
Oliver Quillia for CNBC.com
The New York Stock Exchange, downtown Manhattan.

"People follow the Dow out of tradition. It's got a great, long history," notes Art Cashin, director of floor operations at UBS Financial.

But Cashin, like many other money managers, looks far more to broader indexes like the Standard & Poor's 500, the tech barometer Nasdaq and the Russell 2000, which measures small-cap stocks.

Yes, the Dow generates the most headlines and is still the dominant topic of water cooler talk about how the stock market is performing.

But the other indexes provide investors and managers greater flexibility to find funds that track those indexes and bring more diversity to their portfolios. In a market where volatility has become the watchword, having the chance to increase investment opportunities has become key.

That's true even on days when the Dow replaces two of its components, as it did Monday with the addition of Chevron and Bank of America in place of Altria and Honeywell. Analysts doubt there will be much impact to any of the stocks, as they will continue to be included on the S&P.

"The Dow Jones ... is really an index that retail vendors follow and nobody else," said Nadav Baum, managing director of investments for BPU Investment Management in Pittsburgh.

Bear Stearns analyst Sal Catrini says people follow the Dow because of its tradition as a uniquely American trademark. But he finds that the Dow often performs as a laggard, following the S&P when something moves the market.

"Everybody benchmarks to the S&P," Catrini says. "The S&P moves and the big weighting of the stocks in the Dow are going to move with the S&P. I'm not sure if it's the other way around."

The Dow does have history on its side as the longest-running index on Wall Street. Charles Dow, co-founded of Dow Jones, began publishing what was then a list of 12 stocks in 1896.

By comparison, the Standard & Poor's began a daily index of its top 500 stocks in 1957, though it had been running a smaller index dating to 1923, while the Nasdaq is in relative infancy, having started in 1971.

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