Dow Only Adjusted for Inflation: 1924 — 2008

Last Upate: November 2008

The chart above, and the analysis behind it, is the work of an analyst who prefers to remain anonymous. His web site and further details about the analysis behind this chart, and other compelling observations, are available at his web site here .

This chart shows the Dow Jones Industrial Average (DJIA), an index of 30 stocks also known as the DOW, from 1924 to March 2006. This DOW chart, unlike charts you are used to seeing, is adjusted for inflation. Why adjust the DOW for inflation? If you don’t, changes in the price of the DOW over periods of years are not meaningful. For example, the DOW was 11,000 at some time in 2001 and 11000 again in 2006. Financial reports will often look at these two price points and state that the DOW has stayed flat. Not great but not bad, right? But inflation has increased at least 2.5% per year since 2001, although there is good evidence that the average inflation rate is significantly higher .

The author of this analysis used a DOW starting value of 8.42 for the year 1924. Since then, that value has increased at an inflation adjusted annual rate of 1.64% per year. Yes, you read that correctly. The real annual rate of return on the DOW over the past 82 years has by his careful calculation been 1.64%. That modest rate of return has had many dramatic periods of ups and downs that have given the average investor little net benefit. But these ups and downs, known in the business as volatility, been a boon to brokers. Still, the DOW beats the real estate market, which has stayed more or less even with inflation for the past 100 years.

As bad as an average annual 1.64% real return sounds, it gets worse. Warren Buffett recently noted that frictional costs for all U.S. stocks run between -1.0 and -1.5 % per year annually. As the Forbes article states, In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80 percent or so of what they would earn if they just sat still and listened to no one. A few critics of this analysis point out that it does not take into account long-term past Dow dividend yield: 2.3 % per year. Let’s see: 1.64% minus 1.25% plus 2.3% equals 2.69%. Not as bad as 1.64%, but still nothing to write home about. Start off with $100,000, add 10,000 annually, compund 2.69% annually, and after 10 years you got $246,456.86.

Another way to look at this is in terms of the point price of the DOW as reported and use the Real DOW to make inflation adjustments. For example, the DOW averaged 11281.26 in January 2000, when the Real DOW = 100.0, and both are the all-time nominal highs. In April 2006, 6.25 years later, the DOW averaged just 0.4% less at 11234.68, but the Real Dow is 16.4% less at 83.6. That’s because consumer prices rose 19.1% — the Real DOW inflation index CPI-U increased from 168.8 to 201.1. Using DOW 11281.26 in 2001 as a starting point, the purchasing power of a share of the DOW since then is worth 16.4% less as of the date of this report (April 22, 2006) than the average price in 2000. That means the real DOW in terms of purchasing power is worth 9480 in 2000 dollars when it is reported at the 11340 closing price Friday, April 21, 2006. In other words, think of the DOW at 11340 today the way you would have thought about the DOW at around 9480 in 2000.