May 26 marks 115th birthday of the much-followed — and much maligned — Dow Jones Industrial Average. Charles Dow created the benchmark on May 26, 1896, at a reading of 40 points, representing the dollar average of 12 stocks from leading U.S. industries.
There have been a host of changes to the index over the years, with the lineup of component stocks growing to 30 and involving 48 different formulations since its inception. The index is referred to as an “industrial” average largely out of historical deference, and the modern makeup is meant to reflect the diversity of the American economy.
Some of the most recent changes include Kraft Foods (NYSE: KFT), Cisco (NASDAQ: CSCO) and Travelers (NYSE: TRV) that replaced victims of the financial crisis General Motors (NYSE: GM), American International Group (NYSE: AIG) and Citigroup (NYSE: C).
But why wait until a company goes bankrupt or gets bailed out to rejigger the index? If the Dow is so widely cited by the media and economic analysts, shouldn’t it be a precise gauge of the stock market and the American economy as a whole — and not just a nostalgic list of old giants that have seen better days?
There’s a lot that goes into building an index, and a list of just 30 stocks is always going to have its flaws. But on the Dow’s 115th birthday, allow me to offer my humble suggestions on how to improve the index by kicking out these three stocks and adding three new components.