You’ve no doubt heard over and over the Dow Jones Industrial Average (DJIA) has a compound long term growth rate of 10% per year. This is simply not true!
- On January 3, 1900, the DJIA closed at 68. November 28, 2012, the DJIA closed at 12,985. The compound rate of growth over 112 years is 4.80%.
- The DJIA compound annual growth rate was below 4.80% in 7 of the past 11 decades.
- Each bull market was followed by a bear or “sideways” market that lasted years.
A couple of observations and thoughts:
- Timing the stock market is a reasonable and necessary strategy to create a real positive rate of return (remember – inflation has averaged 3% a year since 1900.)
- You should update your retirement plan if you are using a 10% growth rate, especially if you hope to retire within the next 10 – 15 years.
- Given the history of bear markets following a bull, now is a good time to consider alternative investments like income producing property (IncP.)
The DJIA closing data in the first chart was collected from Yahoo Finance and checked against several sources for accuracy. Note, I assumed dividends and income are offset by broker, fund management and other fees. The second chart is from Rydex|SGI (Guggenheim Investments.)
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