The Dow Jones Industrial Average isn’t as popular an index as the S&P 500 or FTSE 100 among British investors. Yet, despite this lack of popularity, this basket of 30 US stocks has delivered some pretty impressive gains over the years, averaging a 10.8% annual compounded return. And with a lower exposure to volatile tech stocks, the price fluctuations of the index have generally been less extreme.
So, is this index secretly a terrific opportunity for British investors? And how much could a 40-year-old make by retirement starting from scratch?
Setting expectations
Let’s assume that the Dow Jones will continue to generate a 10.8% average return into the future. A 40-year-old planning to retire at 65 has a solid 25-year time horizon. And investing £500 a month at this rate through a low-cost index fund would grow a nest egg to approximately £761,000.
Considering the average size of a pension pot in Britain at age 65 is around £145,900, that’s a pretty nice sum to retire on. And it’s notably more impressive than the £475,500 the FTSE 100 might produce at an 8% return.
However, sadly, past performance rarely tends to be a good indicator of future results. And with the shifting US economic landscape, some analysts are concerned that the Dow Jones may underperform compared to its historical average moving forward.
Looking at the insights from the analyst teams at Vanguard, BlackRock, and Schwab, most anticipate large-cap US stocks to slow their momentum over the next decade, with returns sitting near mid-single digits. Even if momentum picks up later on, this initial suspected slowdown might be sufficient to lower the average gain closer in line with the FTSE 100 or perhaps even lower.
Staying ahead
Assuming the Dow Jones does indeed underperform versus its historical norm, investors could still have the chance to enjoy double-digit returns. Rather than relying on passive index funds, investing directly in Dow Jones stocks could unlock superior returns over the long run.
One such company that might make a bigger splash is International Business Machines (NYSE:IBM). IBM has a bit of a reputation for being a laggard, relying on its old-school mainframe systems and failing to keep up with rapid innovation. However, in the last few years, management has begun delivering some impressive results with a firm-wide shift into hybrid cloud computing and AI.
Thanks to its relatively new Watsonx platform, the company has created a tool that lets large-scale enterprises build, scale, manage, and govern their own AI applications, all while meeting the rigorous compliance and regulatory standards – something that most off-the-shelf solutions can’t deliver. As such, in the space of just over two years, it’s already generated more than $7.5bn in bookings when combined with the group’s other generative AI solutions.
Combining this with ongoing operational improvements and expansion of its other activities, IBM seems to be in a stronger position despite its reputation.
Of course, that doesn’t guarantee it to be a winner. The firm’s track record is certainly inconsistent, and it does remain susceptible to weaker economic conditions, given that customers may decide to delay non-essential or larger-scale projects.
Nevertheless, for those thinking about investing in Dow Jones stocks, this business may be worth a closer look, in my opinion. But it’s also not the only one on my radar.
