For years, people have been led to believe that the best way to accumulate wealth and get ahead financially is to invest in the stock market. The thinking goes: Sure, there are some ups and downs, but over the long term, the stock market always goes up. This impression is, of course, promoted and abetted by Wall Street, and the media seem to be in collusion with it.
The graph shown below in blue, which we call the Nominal Dow, is the standard way to illustrate this conception. But it is misleading, because if the Dow is adjusted for inflation, as shown in the graph in red, the growth is far less dramatic. The difference is enormous.
This adjusted version, called the Real Dow, then portrays it in terms of consumer purchasing power – which is what matters.
To illustrate:Over the 70.3 year interval from September 1929 to January 2000 – each a major peak – the Nominal Dow increased by a factor of 31, but Real Dow increased by only a factor of 3.2 because the Consumer Price Index, increased by a factor of 9.8.
Adjusting for inflation is not a complicated process, but it is almost never seen in the media. A rare exception, which led to this piece was the story headlined “Dow Jones Industrial Average, Inflation-Adjusted, starting January 1924” (The Wall Street Journal, March 30, 1999) – http://homepage.mac.com/ttsmyf/begun.pdf.
Maintaining the myth of the Nominal Dow, of course is to the advantage of stock brokers, but there seems to be almost a conspiracy with the media to preserve it by rarely mentioning the Real Dow. This badly misleads many people in what may well be one of their most important financial decisions. It strikes us as a real disservice to the community.
The Real Dow graph above is repeated below in red, except it is vertically expanded to fill the space; vertical scale is relative consumer purchasing power.
As can be seen, the real price history of the Dow is far from a steady trend. It is characterized by big ups and downs. Notice that the Real Dow in 1982 was less than it was in 1925. This roller-coaster record indicates the huge risk in investing in the stock market. Timing was overwhelmingly important.
The recovery periods after the first two major peaks were each 30 years, so each would practically be the investment lifetime of a person. Hiding, or not showing, this history is a massive deception. This secrecy fooled the people and led to the “financial crisis,” then debited the people to pay for it.
Only three times in the 97-year history of the Federal Reserve System has the Fed’s chairman warned that stocks were overpriced (See: http://homepage.mac.com/ttsmyf/3warnsRD.html). The yellow dots show those three times.
The stock market has been dominated by the coming and going of irrationality. This dominance indicates a dearth of integrity in the everyday, ubiquitous media reporting of the Dow’s price change as news-origin rationality, or even the state of the financial situation in the United States. Young people who have not had experience or time to acquire enough savvy are especially vulnerable.
Obviously, long-term Real Dow returns have been overwhelmingly timing-dependent. What is a fair average growth rate for this as-was past? As detailed online (http://homep age.mac.com/ttsmyf), choosing the two successive big-peak to big-peak intervals – Sept. 1929 to Jan. 1966, and Jan. 1966 to Jan. 2000 – as comparable periods, and relating them, gives 1.64 percent per year compounded annually. The solid blue line, shown extrapolated, is the best fit of this average growth to the Real Dow.
As with stocks, real price histories for American housing are seldom seen. The New York Times of (Aug. 27, 2006) published one (www.nytimes.com/imagepages/2006/08/26/weekinreview/27leon_graph2.html.) It included the observation: “Two gains in recent decades were followed by returns to levels consistent since the late 1950s.”
It is updated as Real Homes in red below; vertical scale is relative consumer purchasing power.
Per the preceding quote, Real Homes was unchanged during 1958-1998, but the Consumer Price Index increased by a factor of 5.6. Not adjusting for inflation is massively misleading. For an elaboration of this, go to http://homepage.mac.com/ttsmyf/RD_RJSho mes_PSav.html.
This deception also hits the young the hardest, leading them to believe that buying a home is a great investment.
Thus many of them are driven to pursue this “dream” with the results we are seeing now.
These are the people who fight our wars and shoulder our debts.
The talk may be “The public’s right to know,” but the walk is “Fool ’em if you can.”
Ed Hamilton holds a doctorate in chemistry. He is a retired research scientist who addresses this topic as a matter of citizenship. Reach him at firstname.lastname@example.org.
Jack Tischhauser holds degrees in physics and math. He retired from Sandia Labs and now works for peace and justice. Reach him at email@example.com.
Both live in Durango.