The S&P 500 Index May Be Superior to the Dow But Its Performance Is Not

Check out this comment from my previous post on the Dow Jones Industrial Average:

I definitely agree that the Dow (DJIA) is built on poor math. However, historical charts of the Dow vs the S&P 500 are almost identical. So I don't think it's really that big a deal.

Well, that comment got me to thinking, "Hmm…I wonder how the Dow has performed against the S&P 500 Index over the last twenty or so years?"

I originally tried to go back to the 1950s but I decided to start with 1988 because that was the first year I had monthly total returns for both the DJIA and the S&P 500 Index. I started my experiment on December 31, 1987 and ended it at yesterday's close (October 27, 2008), using the monthly total returns for each index. I also used a beginning base of 100 to make it easier to compare their performances.

Here's what the chart looks like:

I started with a base of 100 for each index on December 31, 1987. The Dow closed yesterday at 706.75 while the S&P 500 closed at 549.45, an average annual rate of return of 9.85% and 8.53%, respectively. That's quite a difference!

From looking at the chart, it looks like the Dow really started outperforming the S&P around the time the tech bubble popped, which would make sense since the S&P had greater exposure to both tech and telecommunications.

Okay, now don't go thinking I think the Dow is better than the S&P 500 just because it has performed better. I was just curious to see how the two performed side-by-side. I'll try do some more comparisons in the future.