I think you completely miss it, because you can choose any two time periods if you wanted to do so and get different numbers. Forget about the right chart. look at the whole chart and what do you see? you see a sustained upward trend. so historically, yes the trend has been upward. you seem to think the us economy is going to keep continuing to sink. if i invest now and the DJIA goes to 15k in 10 years, how am i paying money now for something that will be worth negative? let me do simple math: today DJIA is around 10600, in 10 years you say DJIA will be 15k, add in dividends and compounding, and that doesn't seem like i'm losing money. or how are you defining growth rate? are you defining growth rate as economic growth rate or DJIA growth rate, because going from 10600 to 15000 is a pretty good growth rate.

For your premise of negative growth rate to hold true, the u.s. economy has to be like zimbabwe and have negative or depressed growth and hyper inflation in your ten year scenario, which is highly unlikely, even with the mess we are currently in. even if the u.s. suddenly collapses, the rest of the world would precipitously collapse as well, and the ratios would still be in our favor. if we were like zimbabwe, gold would be meaningless as there wouldn't be a market to trade gold.

gold isn't the only salvation and it too will precipitously drop. if you looked at gold prices historically, you would have lost out since not only was it flat, but the price wasn't keeping up with inflation and in fact until 2002, it was decreasing. just like in late 70s to early 80s gold bubbled and precipitously dropped and dropped hard. gold is at a bubble now as well and will invariable drop and drop fast. if you bought gold when it was rising early this year and spiked over $1000/oz compared to now, you would be at a serious loss, too. in ten years, let alone 5 years, tell me how you feel about gold. again you can use any two time periods you want to, but that isn't always going to lead you to anything. you shouldn't be basing your investments on a chart by itself anyways and shouldn't be basing it off of hindsight, which you seem to be doing. the biggest reason gold will plummet is because the fundamentals of supply and demand for gold just don't justify the price and has not justified the price, that is why gold prices have been historically flat and depreciating. the only reason we see a spike is because of people's antiquated notion of gold. when there was a gold standard, the case for flocking to gold may have been justified, but not anymore since we aren't on the gold standard. moreover, gold prices aren't necessarily the true cost of gold, because what you can get for gold is scrap cost. i think you should look at the fundamentals before making vast generalizations like you will lose your shirt on the market and be rich off of gold.

last, i don't get your last comment about all Zimbabweans being billionaires. everyone is billionaires in zimbabwean dollar because inflation is well over 100,000% and it takes a billion zimbabwean dollars to buy a glass of water.

Googoo, Dascoon was just kidding.

But your explanations are good and may help people understand why the market's still most likely a good (long term) investment.

Yep, just look at my comment much higher up in the thread, or in any of the posts touting gold as the safe thing.


Partly I think that people missed that I was saying negative 15,000/ -15,000/ (15,000)... That and then the cascadeing asburdness of gold as perfect because it has been going up, and the Zimbabwe comment. Not long ago I read that the country will be cutting off the last eight '0's in their money, maybe me laugh out loud, I knew things were bad, but didn't realize that when they were providing the incredibly high inflation numbers, that those were the OFFICAL numbers, with the real inflation be a couple factors of ten higher.

Extreme inflation would be the quickest solution to the housing crisis and nation debt. In the same way the quickest solution for a hang-nail is amputation.

Back to question 1:
Stocks go up in real terms =growth in GDP + dividend - inflation +/- change in PE ratio.

Much of the reason we've gotten used to 12% growth has been a long-term inflation in PE.

This is what I gather from Jack Bogle anyway. FWIW, he predicts 4-5% average REAL growth in the stock market going forward.

Ryan

I admit I got off-point, but the central focus of my post was whether or not the old saying that "the market has averaged 12% over the past 30 years" is still true, given the fact that people were saying it 10 years ago, and in the intervening decade, the markets have been flat.

So, how 'bout it? Is it still true? What's been the CAGR of the Dow/S&P500/Whatever from September 18, 2078 to today? Is is anywhere near 12%? Is it time to finally drop that tired, outdated "fact"?

Yes, of course. But I'm not picking a random period just for the "doom-and-gloom"; I'm picking my actual period. This isn't theoretical - this has been the actual reality for me, and millions of other Gen-X'ers who entered the workforce in the late 90's/early 2000's. I don't care that you could pick lots of other 10 year windows to show various rates of return - I care what we've actually experienced. And I'm saying I think we got a bum deal. We've been doing everything we were told were the smart and prudent things to do, and we're getting screwed. Screwed by overzealous venture capitalists who thought people would buy their dog food from a website in California and pay to have it shipped to their doorstep in Maine. Screwed by greedy lenders who puffed housing prices up to ridiculous levels while we were buying, only to collapse after we've all moved in. Screwed by terrorists who think crashing planes into buildings will make us convert to their archaic, misogynistic ideology. Screwed by a president who thinks the whole thing can be fixed by mailing out checks for $600. Screwed by speculators who drove the price of oil to record highs.

Don't get me wrong - I'm certainly not altering my long-term investing plans. If anything, I'm pumping as much money as I can into equities right now. I don't need to cash out for another 25 years. I just think it sucks that the Boomers' greed screwed everything up so badly for us.

Agreed, but S&P 500 is only 80 years old. Is that long term enough? 10 years is a hardly insignificant 1/8'th of that, and 40 years (the investment horizon of a young person today) is fully half of that. Is there really enough data available to predict these trends that far out?

Also consider that within the past 80 years, America has gone from almost a third world country to the richest and most powerful nation the world has ever known, just had become urbanized, had humongous population booms, unprecedented advances in technology, and medicine, and so on. If you got in, you did good because you rode the boom of the biggest creation of wealth in human history.

Whether the rates of wealth creation in America over the past 80 years are typical (and sustainable), or an anomaly, I don't think anybody knows.

For comparison's sake, I ran the past 30 years through Nikkei 225 [*] and the CAGR is merely 2.13%. If 12% (or 8% or whatever) is a 'law' why does it only apply to America and not to other modern industrial superpowers? And with our constantly changing administrations, economic policies, demographics, behaviors, laws, and attitudes, how can we expect that whatever magic recipe America has had will continue on at the same pace?

[*] Nikkei, not because I was trying to cherry pick a stagnant country, but because all other major indexes (DAX, CAC, FTSE, Sensex, etc.) are only ~20 years old. Again, not enough data!

Well, that's a bit of a boisterous statement, isn't it? That the world has ever known?

Didn't England own like almost the entire planet at one point? 'Cause I'm pretty sure they did.

I never said it was true. I only said you were doing it wrong because you were taking in too short a time period to make a broad sweeping statement. Anyway, let's get to the number. In the 4th quarter of 1978, the S&P 500 averaged about 96.11 for that quarter. Today, it closed at 1206.51. So in 30 years, it's gone up an annual percentage of 8.8%, not counting dividends. Going with the whole market would certainly result in a higher number, maybe a percent higher. We can just 9.8% but since I'm just guessing, we can stay with 8.8% on the S&P 500, just to be conservative. Remember too that stocks traditionally paid dividends. Not paying dividends has been a relatively recent phenomenon, become popular with the tech boom of the mid-to-late 90s.

Given all of that, your long-term returns at worst would have been in excess of 8.8%, right? No fuzz, no doubt, since we're not taking into account dividends or small cap stocks. It could really be as high as, what, 11% maybe, if we could take those factors into account. If someone can get us accurate data that goes back that far, I'm sure that one of us can crunch the data. So yes, 12% over the last 30 years would seem overstated and doesn't take our current stagnant state into account, but it's not that far off.

Also, you need to consider this: if you'd asked this question just a year ago, the answer would've been markedly different. In the 3rd quarter of 2007, the S&P 500 was 1526.75. In the 3rd quarter of 1977, it was 96.53. That would've been just over 9.6% return per year. Add in dividends and small caps and you would have easily finished over 11%, maybe 11.5% or more.




And this is relevant how? Don't get me wrong, I really do sympathize. I'm feeling the same pain as you are. But I'm also sure the same kind of whining was heard in the 70s by folks who invested during that period. All that whining didn't change a damned thing. The market still does what it does.

Ummm, I feel a bit like David before Goliath, so I will say up front that I am NO economist--I am however a hydrogeologist who knows a bit about long, boring, modeling calculations. So, it would seem to me that the definitive way to solve this question is to stop picking and choosing individual 10 year or even 30 year timelines and simply take all the 80 years of data, have a computer model spit out the annualized rate of return for ANY GIVEN 30 year period to date. From Day 1 to Day 365 of Year 30, and each day from there on until all the data is crunched. Then look to see if there has EVER been a 30 year span that hasn't reached 8%, 10%, 12%, whatever we want to argue. I picked 30 year spans because I agree that 10 years is too short term, and most people should be looking at investing the entire length of their career. Now surely more than one university somewhere in the world had been granted tons of money to crunch this, right??? Come on Jericho, you're the brainy acedemic, right?

The real answer to the 12% question is depends on inflation. After all, if you have 7% inflation, it's not too hard to get 12% nominal returns. You wouldn't want it though because the government taxes you on the full 12% even though only 5% is all you only got. So yes, the past 35 years have had 12% nominal returns but inflation was relatively high. Here's a chart I generated using Schiller's stock data from 1871 to 2006.



Remember, there are no guarantees in investing. If there were guarantees, expect Treasury returns. Instead, all you can talk about is likelihood and probability. The ratios for the last 108 rolling 30 year periods:

2%-3%: 1
3%-4%: 3
4%-5%: 21
5%-6%: 21
6%-7%: 16
7%-8%: 17
8%-9%: 20
10%-11%: 8
11%-12%: 1
Average: 6.6%

I'd group the broad range from 4% to 9% as probable. Worse case, plan for 4% real. If the 2%-4% real happens, there's nothing you can do anyways -- you're SOL no matter what decisions you make.

You put all your money in the market in May 1999? Or have you been making contributions since then?

Anyway, most of us know that equities are risky. That's what the risk premium is: If you want a reasonable chance of making high-single-digit to double-digit returns on your money, you also have to take the risk of losing a substantial portion of it. If you don't want to take that risk, you stick to treasuries. I was with you until I got to the "we got a bum deal" part. You invested with your eyes open to the risks and if you didn't, you have no one to blame but yourself.

Those charts are the S&P500. Can you find the data for the DOW?

the one thing the graph does not depict either though are dividends and subsequent purchases.

Sorry but it does. I don't make silly mistakes like that. Note those graphs are *REAL* returns. If you added the historic 4% dividend rate to those numbers, they would be through the roof and totally ludicrous. (E.g. 6.6% real + 4% dividend + 4% inflation = 14.6% average return which we know did not happen.)

That's why I don't do DOW numbers. Impossible to get the dividend rates for them.