The Dow Jones Industrial Average is the most inaccurate and distorted of all stock indices – and yet it remains the most followed stock market index.
Many of the Dow’s flaws are well-known, but that hasn’t stopped people who should know better from following its every move.
There are plenty of reasons why the retail investor needs to take the Dow Jones Industrial Average with a grain of salt.
Even the most basic aspects of the DJIA are flawed. When Charles Dow created the index in 1896, it consisted of 12 companies. In 1916 the number was increased to 20, and in 1928 increased again to 30, where it has remained.
In both of those cases, and more than 50 times in the history of the Dow Jones Industrial Average, the component companies were changed. Such changes led to the creation of a clunky method to keep the index price consistent, the “Dow Divisor.”