“The safest way to double your money is to fold it over once and put it in your pocket.”
– Kin Hubbard
The Dow Jones Industrial Average has been in the news lately, breaking the 20,000 mark and raising beyond it. The Dow has achieved twenty-one new highs since the presidential election. Last Friday’s close (February 10) was the highest to date at $20269.37.
All of the major stock indices pushed upwards this week following the president’s promised tax announcement. “Lowering the overall tax burden on American business is big league,” Trump said to airline executives during a White House meeting, though he did not give specifics.
It may appear that the stock market bulls have proven right. Even we have said, “it’s time to get out of the market,” but then again, we never believed it was time to get IN the market in the first place.
Were we wrong? Has the market proven our pessimism to be unfounded?
Let’s look… with wide-open open eyes to see the whole truth.
(But first…) The Dow for Dummies
Invented by founding editor of The Wall Street Journal, Charles Dow, in 1896, the Dow Jones Industrial Average (DJIA) is a gold standard of the investing world. It is a price-weighted average of 30 significant companies that represent the best of the blue chip stocks traded on the New York Stock Exchange.
Often referred to as “the Dow,” the DJIA is one of the oldest, single most-watched indices in the world and includes companies such as General Electric, Disney, Exxon, Goldman Sachs and Microsoft. When you hear the media report “the market is up (or down) today,” they are generally referring to the Dow.
Unlike the Standard & Poor’s 500, (“the S&P”,) which is simply the 500 largest firms in the U.S., the companies in the Dow are chosen for their perceived strength and soundness. Companies in the Dow represent several industries, such as financial, food, technology, retail, heavy equipment, oil, chemical, pharmaceutical, consumer goods, and entertainment. Stocks are chosen by the editors of the WSJ and must be industry leaders that have demonstrated sustained growth and are of interest to a large number of investors.
Measuring Apples to Apples
The stock market has unquestionably been on a long and impressive rally. But to truly measure the gains of the market, we cannot compare the lows to the highs, or the highs to lows. We must measure “low to low” and “high to high” to obtain an accurate picture.
And even we were surprised… Shocked, actually, with what we discovered when we looked at the highs and the lows of the Dow.
High to High = Low Returns
We computed the rate of return from the last Dow Jones 2007 high — before the 2008 crash and the great recession — to today’s current high. After nearly 8 years of steady growth, how has the market performed?
The pre-crash high of $14,164.53 set a record on October 9, 2007 that stood for several years. We compared that to the Friday’s (February 10, 2017) high of $20,269.37.
Rounding to the nearest dollar and using a time frame of 9.34 years to represent the nine year, four month and one day time frame, we plugged the numbers into a Truth Concepts financial calculator and solved for interest rate.
Since its last high, the Dow Jones, comprised of the best blue chip stocks in existence, has earned a measly 3.91%, or, to be exact, 3.91112896578593.
Even we’re a little stunned. And perhaps those popping corks on Wall Street should put away the champagne.
What happens when we go back to a previous high? How has the market performed since the high before the Dot Com Bubble crash? The Dow closed at 11,722.98 by January 14, 2000, according to TheBalance.com. Let’s plug in that as our starting point and change our time frame to 17.06 years:
Yikes, even worse – 3.26%.
To find a “high to high” return of over 7%, we have to go back nearly 30 years to 1987, before computer trading caused Black Monday’s precipitous drop of over 22% as sell orders were automatically forced in a falling market.
Unfortunately, it’s no longer your parent’s stock market.
Low to Low = Even Worse
If the highs are not impressive, the last low-to-low is downright alarming. Simply looking at a stock market chart, you can see that its swings seem to be becoming more pronounced:
The Dot-Com crash brought us a closing low of 7,286.27 on October 9, 2002. After our last crash, the Dow hit a 12½ year closing low of 6,547.05, on March 9, 2009, according to Wikipedia.
We plugged in those numbers and saw, predictably, a negative result:
Hopefully, we will never see a lower low than that!
The Big Picture View
Even if we disregard the recent past and look at the longest possible time frame, the gains of the Dow are underwhelming.
The DJIA debuted in 1896 at 40.94. There’s no longer term measure we can make than 121 years. Even then, we’re underwhelmed with the result, a mere 5.26% gain:
And even these depressing gains (and losses) are misleading. Why? Because:
- The DJIA represents “the best of the best” of the stock market, not the market as a whole.
- Even blue chip companies fail, which is why the Dow routinely replaces old stocks with new market leaders.
- These numbers are not adjusted for inflation, which would likely slash the gains to less than half.
- The gains don’t account for dividends, which would add to profits (yet which have been steadily decreasing.)
- No fees or taxes were used in the calculations, which would adjust the results significantly downward
- And because your dollars are tied up, not liquid, and never guaranteed in the stock market.
You’ve heard the phrase, “Question authority.” We believe this needs to apply to the “financial authorities” telling you you’ll average 8, 10, even 12% (Dave Ramsey still stands by this) when it is simply not true.
Do Stock Market Investors Have a Gambling Addiction?
The increased highs and lows of the market may lead you believe that you’ll “come out on top,” but that’s the psychology of gambling.
People don’t gamble in Vegas because they hope to come home with 4% more than they left with (although many of them would be happy if they had achieved that feat!) They gamble for the big win. They spend all they have hoping for the jackpot.
In an article on The Psychology of Gambling, Samantha Gluck observes, “Most people think about gambling as a low-risk, high-yield proposition. In reality, it’s the opposite: a high-risk, low-yield situation…. Despite that, the thought and excitement of hitting a casino jackpot are often too alluring – regardless of its probability.”
American investors deserve better.
This was not a difficult computation. Any financial journalist, any accountant, anyone with an internet access who can google “financial calculator” could have discovered the truth about stock market returns.
Yet headlines read “Dow Hits Record High as Wall Street Celebrates…” and “To Infinity and Beyond.”
It’s downright shameful that the best that typical financial planning can do is recommend strategies that deliver less than 4% (plus dividend earnings, and Dow dividends have decreased to about 2.65%), while tying up assets and leaving investors with little control and frayed nerves.
Our definition of an excellent investment is “double digit returns, no loss of principal.” That’s the goal that we aim for. You may need to be an accredited investor to achieve that goal, but it is not out of reach for those who are willing to buck mainstream financial advice.
And if your goal is savings… savings should never be in the market. Savings should be liquid, safe, and reliable, with the ability to use as collateral. And NOT sitting at 1% taxable, as bank products are right now.
Find out more about Prosperity Economics and alternative ways to save and invest. Get a complimentary copy of Financial Planning Has Failed, our ebook that details how to build sustainable wealth without Wall Street risks, worries, and poor performance.
Our clients don’t worry about what the market is doing from day to day. But best of all, they’re not gambling their future on the Wall Street Casino. While the odds are admittedly far better in the Dow than in Vegas, don’t you deserve better results?