One year our vacation consisted of traveling to Missouri, Illinois, Iowa, Minnesota, Wisconsin. We finished in Chicago, Springfield, St. Louis and then home. It wasn’t quite a beach trip, but my Mother-in-Law got to add several new states to her “list.” One of our stops was at the Rock Island Illinois Military Cemetery where my Great-Great-Grandfather Hallmark is buried. He was a Confederate soldier, who was captured in the Battle of Chattanooga. He contracted Smallpox as a prisoner, died, and was buried there. Had he lived, he would have been old enough to see the precursor to the Dow Jones Industrial Average. 

On July 3, 1884, Charles Dow, an American financial journalist published a list of eleven stocks in his afternoon newsletter. This was the precursor to the Dow Jones Industrial Average, and was composed of nine railroad stocks and two others: 

I’ve never heard of most of these companies. They must not have survived as the country grew and developed. By 1916, only Western Union appeared in the list of the 20 stocks of the Dow Jones Industrial Average. By 1928, the list of stocks had grown to its present number of 30.

As I was researching the historical data of the Dow for another article I was writing, I was struck by how the stocks in the Dow have changed over time to reflect the evolutionary character of American business. The first “official” list of 12 stocks came out on May 26, 1896, and closed at 40.94. I was fascinated by the composition before and after the Great Depression, as well as after World War II. Our country had changed radically over the first 100 years of the index, and over that time the list continued to morph to reflect that change.

That’s why I wrote the article, The Dow Cheats. While there are a few companies on the current list that may seem a bit stodgy, companies like Amazon, Apple, Salesforce, and Microsoft are aberrations from the list a few years ago. Unlike other indices, the Dow changes to reflect the business culture over time. It almost has the same advantage that the NIL and the Transfer Portal have created in college football. It has the unique advantage of being able to drop the “losers” and add the “winners” to the index. 

The disadvantage of the Dow is the lack of diversification. The math is simple: 30 stocks vs. 500 stocks. The S&P 500 has 16.7 times as many companies as the Dow. In the mutual fund world, the Dow would be considered a concentrated fund. Just for fun, I reviewed my old Weston & Brigham Finance text, and sure enough, it says that it takes at least 40 stocks for a portfolio to be well-diversified. 

Here’s today’s Dow 30. Only four companies, 3M Company, Chevron (formerly Standard Oil of California), International Business Machines, and Procter & Gamble Company, were on the list the day I finished Graduate School in 1976. Today there are only four “Industrials” and two other companies that are almost industrials: Basic Materials and Energy.

Rick Adkins, CFP®, ChFC, MBA

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