01.12.2020- Why the Dow has been going up for 124 years

Why the Dow has been going up for 124 years:

Sam Ro

·Managing Editor

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No original members of the Dow remain in the index

In case you missed it, the Dow Jones Industrial Average (^DJIcrossed 30,000 for the first time ever last week.

As usual with every Dow milestone, people were quick to pour cold water on the news arguing that round numbers aren’t special and that because the Dow is a price-weighted index it’s somehow inferior to market-cap-weighted indices like the S&P 500 (^GSPC).

Read more: What is the Dow Jones Industrial Average? A full breakdown

But the Dow and its milestones have a ton of merit and relevance, and they can teach investors a thing or two about investing.

One notable characteristic of the Dow is that, like the S&P 500, it goes through a lot of turnover. In fact, no members of the original 12-component Dow from 1896 remain in the index. General Electric (GE), the last original member, was replaced in 2018. ExxonMobil (XOM), which was a member of the Dow when it became a 30-component index in 1928, was the oldest member of the Dow when it was eventually replaced in August.

This turnover explains why these market indices keep going up. The committees that manage these indices are regularly replacing names with those that make them more in tuned with the economy, which also sees outdated business models get replaced by new ones.

“While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors,” S&P Dow Jones explains.

Charles H. Dow and Edward T. Jones, founders of Dow Jones and Company, are the “Dow” and “Jones” in the Dow Jones Industrial Average. (Getty)

That qualitative human touch that goes into maintaining the Dow may be a bit unsettling, but the track record is nevertheless impressive. They added Apple (AAPL) to the index in 2015, a stock that’s up an eye-popping 61% year-to-date; the name it replaced — AT&T (T) — is down 21%.