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The keepers of the Dow Jones industrial average are giving up on Bank of America Corp., Hewlett-Packard Co. and Alcoa Inc. Should you?

The three struggling heavyweights are being tossed out of the blue-chip index in favour of incoming Goldman Sachs Group Inc., Visa Inc. and Nike Inc. – marking the Dow's biggest overhaul since 2004, and giving it a look that is heavier on financial services and apparel.

Changes at the Dow aren't as influential as, say, adjustments to Warren Buffett's investment portfolio. The index, after all, is designed to reflect the market rather than beat it.

Nonetheless, the changes are loaded with meaning that no doubt is going to make every investor sit up and take notice. The best approach, though, is to sit back.

The Dow is supposed to represent a cross-section of the biggest and best companies in the United States. So, when a beaten-up stock is jettisoned, the concern is that its best days are over.

The departing stocks – changes take effect at the close of trading on Sept. 20 – certainly fit that pattern: Over the past five years, Hewlett-Packard has fallen 52 per cent, Bank of America has fallen 55 per cent and Alcoa has fallen 70 per cent, versus a 34 per cent gain by the Dow over the same period.

By comparison, the incoming stocks look like winners: Nike has risen 122 per cent over the past five years and Visa has risen 166 per cent. Even though Goldman Sachs has risen just 5 per cent, lagging the Dow, it has outperformed most U.S. financial stocks during a very difficult time for that sector.

In other words, the Dow is doing the index-equivalent of buying high and selling low. This is understandable if you're a price-weighted index such as the Dow, weighting stocks on price rather than market capitalization.

The three departing stocks had little sway on the direction of the Dow, which boosted the influence of stocks such as International Business Machines Corp., Chevron Corp., 3M Co. and Boeing Co. – four stocks with a combined weighting of more than 27 per cent. The heftier additions will lower that figure.

But as an indication of where stocks are headed, the latest changes of the Dow should make little difference to investors. After all, ex-Dow components have a habit of performing well after leaving the venerable index, while newcomers can struggle.

Chevron was dropped from the Dow in 1999, when crude oil traded for about $22 (U.S.) a barrel; the energy producer has since risen more than 160 per cent. It was replaced by Microsoft Corp. when the dot-com bubble was nearing its bursting point; the tech stock has since fallen more than 40 per cent. (Chevron returned to the Dow in 2008.)

Citigroup Inc. was dropped in June, 2009 – or close to the bottom of the bear market that decimated financial stocks in particular. It has since risen nearly 50 per cent, or more than double the return of the stock that replaced it in the Dow, Cisco Systems Inc.

This isn't to suggest that the Dow is a bumbling contrarian indicator, inspiring investors to do the opposite of everything it does.

In fact, the index performs remarkably well over all: It has outperformed the broader S&P 500 over the past five- and 10-year periods, after factoring in dividends. That is something the vast majority of actively managed mutual funds cannot match, let alone individual investors.

But as for following the Dow's lead when changes are made, don't bother. Just because a stock has been sent packing from the index doesn't mean that it is now facing a death sentence.

Similarly, inclusion into the Dow doesn't mean a stock is bound for great things – and Hewlett-Packard, added in 1997, provides the latest proof: As a Dow member, it rose just 2 per cent in 16 years.

Perhaps outside the Dow, it will fare much better.

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