What was the average annual interest rate delivered by the Dow Jones Industrial Average stocks during the 20th century, a rate of return so consistently positive that it all but defines the massive economic expansion that took place over the past 100 years?
Six months ago, one of the most powerful and exclusive clubs in modern history revised its membership, with consequences that effect more or less every human being on the face of the Earth.
On Feb. 19, 2008, the Dow Jones Industrial Average was reconstituted so that a slightly different roster of 30 stocks was used to populate the world's most famous, and arguably most influential, investment index. It sounds a lot less impressive to say that the Dow Jones Industrial Average kicked out the Altria Group and Honeywell and replaced them with Chevron (who had been there before, but was kicked out in 1999) and Bank of America.
How could this possibly affect every human being, everywhere? Simple: The Dow is the most watched barometer of the most influential market segment of the most powerful national economy in the world. What happens to the Dow affects investor and consumer confidence pretty much everywhere, which in turn sends ripples through every economic system on the planet.
Now, whether 30 rather arbitrarily chosen stocks weirdly averaged together should have a profound impact on the world economy is another issue. There's probably a rather cogent argument to be made that the Dow shouldn't be as important as it is and that most of the Dow's influence comes from its notoriety and longevity, rather than its objective fiscal relevance.
The Dow Jones Industrial Average was originally just that — an average of the value of a dozen influential stocks chosen for the edification of the readers of Dow Jones & Company's Customer's Afternoon Letter. The average was first published on May 26, 1896 (the stocks and their average values obviously existed before the actual first calculation of the Dow Jones Industrial Average). Of those original dozen indexed stocks, only General Electric — in a vastly different and diversified form — is still a component of the Dow. The Dow is also no longer just an average, as an adjusted divisor was added to its formula to compensate for stock splits and other market vagaries.
Yet, for all its faults, the original Dow and its component stocks were and are a study in long-term value and viability. Of the original 12 Dow component companies, only one — the United States Leather Company — has gone out of business, and that didn't happen until more than 50 years after the first publication of the Dow Jones Industrial Average. Moreover, as it spanned the entire 20th century, the Dow Jones Industrial Average offers an intriguing look at the economic growth of that period in history, especially when you consider the average annual interest rate the Dow's component stocks offered over those rather pivotal 100 years.
WHAT WAS THE AVERAGE COMPOUND ANNUAL INTEREST PERFORMANCE OF THE DOW JONES INDUSTRIAL AVERAGE FOR THE 20TH CENTURY?Get the answer.