The Alpha Dow vs. The Dow Jones Industrial Average

To most investors, the Dow Jones Industrial Average is "the market". Yet very few investors track the Dow in real terms; that is, adjusted for inflation. Inflation-adjusted returns are, however, the true measure of investment success since they tell us how our purchasing power is affected. The charts in this series of illustrations do just that.

The Alpha Dow is easy to understand. We construct it by holding the Dow Jones Industrial Average (with dividends) for six months each year: November 1 - April 30. The other six months are invested in the Barclays Capital Intermediate Treasury Index - an index of government bonds with maturities in the 3-7 year range.

The Alpha Dow demonstrates how stock market returns are "skewed" over time into the annual "power zone" (November - April). It shows how much investors "pay" for exposure to stocks during the annual "dead zone" (May - October).

The bottom line for long-term investors is very clear - avoid the "dead zone". The first rule of investment is this: take no unnecessary risks.

For more information on this phenomenon read the article "Winning the Stock Market Game: Be The Casino" under Articles in the Alpha Research section of this website. Also see the Alpha Mid-Cap Power Index Managed Account investment program in the Strategies and Performance section.