Ever flip on over the CNBC and watch their stock picking experts talk about chartology? It's the process of looking at a graphical depiction of a stock or market performance and making “educated” guesses about where the market (or a particular equity) is going based on the statistical data that represents the chart's graphical display. It's not perfect, but it's something a lot of Wall Street types get really excited over, and it's probably something you've run into if you've spent more than 10 minutes with a stock broker who wanted to pitch you on his or her latest and greatest stock idea. Well, here's a chart that most 3rd graders could make a prediction off, and it's not good news for the buy and hold folks. It's the historical data for the Dow Jone Industry Average, the index of the largest publicly traded companies in America (read: where the “low risk” blue chips call home).
The immediate take away should be the plateaus and very strong increases that the Dow has historically pulled off. The second take away should be that the Dow typically sits relatively stagnant for a little over 20 years in between those rallies (and we're currently about 10 years into Dow Jones nothing-ness).
So, does this mean abandon hope for the stock market? Not entirely (of course) but it means don't buy the hype around that magical 8+% return you hear quoted so often by Financial Media no-nothings and stock jockeys. On top of that, if you are looking at your retirement horizon and mulling over how much money you should be saving based on certain assumed rates of returns you should plan accordingly. And when we say plan accordingly, we mean plunking money in your 401k isn't going to work like it did in the 90's (that ship sailed).
So, What Should I Expect? What Has the Return Been?
Additionally, those die hards over at Camp Pam did some math a year ago and determined that in order to realize a 5% annual return since the Dow first hit 11,000 (not far from where it sits today) in 1999 (no that's not a typo) the Dow would need to be at roughly 27,000 today (actually, this was done a year ago, so it would need to be higher than that). And in order to get the magical 8% that all citizens of the United States are guaranteed (wink) the Dow would need to be north of 34,000 right now.
So, since that earth shattering (and record breaking) moment, the DJIA has basically gone no where…and it's been right around 12 years. And every year we tick on it's only going to get worse from a rate of return perspective (meaning we'll need more than 27,000 to get to at least 5%). Also interesting to note, the numbers were calculated in a vacuum assuming no fees or taxes were paid (yikes!). So when reality comes into play, the actual rate of return isn't just flat, it's negative.
There's more to this story that we'll likely revisit time and again and continue to pick apart. Chief among the numerous side comments is the notion that most stock market booms where preceded by some major innovation. The Post Depression (and Post War) era was marked by reconstruction and huge labor projects that rallied optimism (not to mention changed the landscape–literally–of the United States). Then, in the 80's we had the advent of the personal computer when Steve Jobs brought personal computing mainstream and ignited the largest economic boom we've ever known.
What's the next big thing that will boost us 27,000?
Or maybe it's time to fix all of those roads and bridges?
Whatever it is, it has to spur enterprise; simply growing the economy isn't enough (see myth #4).
While it isn't fun to be a naysayer and cast a dubious cloud over the DJIA or any major index in the United States. It's financially prudent to keep in mind what we've preached for some time now, and make it a part of your everyday life moving forward. Treat stocks like the white specs we used to see at the top of the old USDA Food Guide Pyramid, USE SPARINGLY.