Dow Jones Industrial Average Celebrates 119th Birthday

by | May 27, 2015 | Asset Management, Podcasts

Yesterday the Dow Jones Industrial Average celebrated its 119th birthday! Charles Dow and Edward Jones created the index, and it was first calculated on May 26, 1896. While the Dow Jones Industrial Average is certainly the most discussed US market index, you may be surprised to hear that it’s actually only the second oldest. Dow and Jones created the Dow Jones Transportation Average first! Tom and I discuss the Dow Jones Industrial Average’s 119 year transformation, and point out a useful tip we can take away from it on this week’s podcast.

Back in 1896, Charles Dow and Edward Jones wanted to measure the performance of the industrial sector within the overall US economy. Their solution was the Dow Jones Industrial Average, which price weighted 12 stocks into an index. This price weighted index featured stocks from major US industries like tobacco, railroads, leather, and cotton. These 12 stocks were supposed to be the barometer that measured American industry. Somebody reading this information today might be surprised to hear of the Industrial Average’s roots. Many of today’s Dow stocks have little or nothing to do with the industrial sector.

Other than longstanding General Electric, the only constant in the Dow Jones Industrial Average has been change. There have been 53 stock changes in its 119 year history. Not only the index members have changed, as we’ve also seen the number of holdings increase over time. What was initially 12 stocks became 20 for a brief period, and ultimately ended up being the 30 stock index we know today. Lately, changes to the members of the Industrial Average have occurred with pretty high frequency too. The most recent change was Apple’s addition to the index in March of this year. The index’s price weighted methodology has remained in place throughout its history. This ensures that the highest price stock in the Dow Jones Industrial Average receives the heaviest weighting, and thus the most influence.

Just as we’ve seen the Dow Jones Industrial Average grow from 12 industrially based stocks into 30 major US companies, we can see changes and adaptation take place in our own portfolios. The number of holdings you have may not remain static over time, and you may not own an individual stock or fund forever. The only constant is change, meaning everybody should be periodically reviewing their portfolio and staying abreast of any changes that may need to take place.

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