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The Original Dow Jones Industrial Average Companies and Why Investing in Index Stocks is Safer

undated picture of Charles Dow in suit wearing a beard circa 1900

One of the original stock market operators that understood the mechanics of how the market prices stocks was Charles Dow and in his forward-thinking mind, created the Dow Jones Industrial Average in 1896.

Charles Dow (pictured here with the beard) understood and illustrated that by creating an index basket of stocks, anyone could get an accurate overall sense of the market and economy at a glance. Over 100 years later, investors, the media, and professionals use market averages to measure the stock market and the performance in relation to their own returns and the economy in general. 

Dow started his famous average with 12 companies that included the following:

American Cotton Oil

American Sugar

American Tobacco

Chicago Gas

Distilling & Cattle Feeding

General Electric (GE)

Laclede Gas

National Lead

North American

Tennessee Coal and Iron

U.S. Leather pfd

U.S. Rubber

Keep in mind that at the time, the index value had to be calculated by hand each day and electronic calculators and computers weren't available. So Dow picked the above companies in order to have his average represent each key sector in the US economy and stock market without creating an overwhelming amount of overhead to track. It's also important to note that at the time, there weren't that many stocks trading, so 12 stocks was proportionately a much higher representation then. While the NYSE represents about $20 trillion in market capitalization, representing about 3000 companies, and trading about 2.5 billion (yes with a "b") shares or more in a day in 2015, back in 1896, a million shares in any given day was considered huge volume.

If you don't know most of the above-listed companies, you're not alone and you shouldn't be surprised. The only company that remains in its original name as part of the list is General Electric. The rest have either gone out of business and/or consolidated with other companies. The important take-away is that while it may appear that stocks on average continue to climb over time, it's the averages based on stocks that are strong at any given time. Stocks that fall out of favor (and profitability) are soon removed from the averages, and that includes other popular indices like the S&P 500 index, which usually consists of between 495 and 505 stocks. Contrary to popular belief, the S&P 500 doesn't always have exactly 500 stocks in it. 

Another take-away is that if you want to have your portfolio climb over time (based on historical information), you may want to cut your losers loose after a while and not allow them to fall to zero before selling. Or, a strategy I often recommend is to simply buy the average via futures, or more commonly through ETFs including the (DIA) and (SPY). When you buy "the market" you may not beat the market, but you will beat most fund managers and avoid their fees in the process. By using an option strategy that I discuss in my options newsletter, you can even outperform the market based again on historical averages of the option's market while also lowering your overall risk.  There's no free lunch on Wall Street though, and the only way you can avoid management fees is to manage your portfolio yourself. 

That's easier said than done because broker fees and inefficiencies can cost the average investor money too if they're not careful.  I use Interactive Brokers (IBKR) for active trading and Tradestation for IRAs and lower volume trading because I like its charting and software solution. Interactive Brokers doesn't offer the same level of charting and scanning, albeit their fees "can" be less.

For those interested in a steady stream of income, especially for retirement, annuities are a viable solution for many, albeit that's beyond the scope of this article. I do discuss annuities and the pros and cons on 1reason.com and if you're interested, you can read about them as a financial solution. Investors that don't have a need for guaranteed income will find that it's hard to beat the stock market for long-term growth, but only if you invest wisely and as I illustrated above, understand that you should not count on your particular portfollio to increase in value just because market averages have.

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