The internet is a vast sea filled with various trading and investment strategies, each purporting to be the golden key to unlocking significant returns.
Amidst this abundance, one strategy that has garnered attention is buying the top three worst-performing stocks in the Dow Jones Industrial Average (DJIA). But is this approach as promising as it seems?
The DJIA is an index comprising 30 significant stocks traded on the New York Stock Exchange and the NASDAQ, and it’s often used as a barometre for the overall U.S. stock market. Could buying its losers lead to big future gains?
Honestly, probably not. Bear with me as I explain why I find the idea of buying the DJIA’s three worst-performing stocks unappealing and what I would consider investing in instead.
The “Dogs of the Dow” Strategy
Today’s strategy is a variant on the “Dogs of the Dow,” which is based on the premise of buying the Dow’s 10 worst-performing stocks from the previous year and holding them for a year. The idea is that these stocks are due for a rebound and will recover their losses and pay out decent dividend yields.
As of August 4, the three worst-performing DJIA stocks fitting this profile are Walgreens at -17.9%, Verizon at -15.5%, and Amgen at -12.3%. Investors following this strategy would, in theory, purchase these stocks with the expectation that they would bounce back.
Why I wouldn’t use this strategy
The idea of investing in the Dow Jones’s three worst-performing stocks has several inherent flaws, in my opinion.
By focusing solely on the three worst-performing stocks, you expose yourself to a tremendous lack of diversification. Investing all your resources in these few stocks could lead to an imbalance in your portfolio, making it more vulnerable to market swings. If one of these stocks suffers, the impact on your investments can be significant, as there’s no spread of risk across various sectors or companies.
Moreover, simply ranking these stocks based on their performance in the Dow does not provide actionable information about their true investment prospects. It overlooks crucial factors like the company’s earnings, debt, management, industry competition, and overall market conditions. Without understanding the underlying reasons for their poor performance, blindly buying these stocks is a gamble rather than a well-considered investment decision.
What I would invest in instead
Instead of buying the DJIA’s losers, a more appealing and stable strategy for me would be to buy the index itself. One such option is BMO Dow Jones Industrial Average (Hedged to CAD) Index ETF (TSX: ZDJ).
Traded in Canadian dollars, this exchange-traded fund offers easy exposure to all 30 DJIA stocks, providing a more diversified approach that isn’t dependent on the performance of only a few selected companies experiencing negative momentum.
By investing in the index, you align your portfolio with the broad movement of the market rather than the potentially volatile paths of individual stocks. In my opinion, ZDJ presents a more methodical way to invest, rooted in a holistic view of the market rather than a gamble on a few struggling players
