I agree that DJIA plotted over time leaves out dividends and as such it understates the returns. Forgetting the dividends for the moment and using DJIA as a barometer of the general stocks, In may of 1966 (if memory serves me correctly) DJIA hit just above 1000. Today, it is at 9300. So in 33 years it has gone up by 9.3 times in nominal terms. But, between 1966 and 1982 when DJIA broke 1000 again, you lost about 85% of the asses value to inflation. Since 1982, using the average inflation rate of 4% (I am not certain this is the right value but I believe it is close enough for our rough calculations since for part of that period inflation was over 8%) you have lost another 50% to inflation. In all your real gains (ignoring dividends) has been 0.15 * 0.5 * 9.3 = 0.93 or a loss of 7%! Even if we make the inflation 3% (which is too low) and say that you lost only 80% to inflation between '66 and '82 (which you lost more) then your real gains are still only 0.2 * 0.6 * 9.3 = 1.1 or a real gain of 10% in 33 years!
This leaves us with the issue of dividends. I have three things to say on this. Number one is that the Dow stocks all survived this time period and many smaller companies did not. That is a loss which is not reflected in above calculations. Second, in order to have the gains that those sales brochures a.k.a investment studies promise you, you would have had to reinvest all the dividend into the stock market. I find it hard to believe that anyone can watch their investment shrink by more than 80% over a period of 16 long years when you'd see an oil crises, gas lines, gold and silver fiasco, etc. and still stick with the same dividend reinvestment method. I don't think this is a realistic expectation. Third Dow stocks pay a higher dividend amount than most and they have appreciated a lot more during this bull market than the average stock. So the the gain factor of 9.3 was already generous. I wonder how a random sample of 1000 stocks would have done since 1966.
best regards,
Sun Tzu
P.S. I did a rough sketch of the calculation here. If you want a more accurate one, I'm sure you know which web site to go to <G>
PPS This time period was not an anomaly. Pick any 30 year time period that includes 1929 and you would not have made a substantial gain during that either. So in all, I've shown that there's been 63 years in this century that a buy and hold would not have made you money over a 30 year period. |
