Dow 6,787,047?

Ever wonder where the Dow would be if it had various annual percentage gains over time? If you're expecting annual gains of 5-10%, you should at least know where this would put the Dow in 25, 50, or 100 years. Just as investors in 1900 probably couldn't imagine the Dow ever getting to 14,000 when it was at 70, it's crazy to think that the Dow would be at 6,787,047 in 100 years if it averages the yearly change that is has had since 1900 (+6.95%).

Looking ahead to just 2020, if the Dow averages a yearly gain of 6.95%, it will be at 18,356. If it averages 10% yearly gains, it will be at 25,723, and if it averages a more modest 3.5% gain (similar to fixed income), the Dow will only be at 12,385.

By 2050 things look a lot different. If the index averages 6.95% a year, it will be at 137,783, and if it goes up 10% a year, it will be at 448,843! At 10% a year, the Dow would cross the 1 million level by the end of 2059. At 6.95%, it would cross 1 million in 2080. At 3.5% annually, it would only be at 255,645 in 100 years. At 10% a year, the Dow would be at 112,945,899 in 2108. These big discrepancies in price levels show just how much difference a few percentage points annually makes.

If you're assuming the market will average yearly gains similar to what it has in the past, you're betting on Dow 137,000 in 40 years. We guess it's possible, but it's still a crazy number to think about. Just as stocks have a harder time growing as they get bigger and bigger, the same holds true for overall markets. While the Dow went up 6.95% a year from 1900 to 2008, the US was moving from an emerging market to the most developed nation in the world. Unfortunately the same can't happen over the next 100 years. In our view, this makes picking the right stocks, world markets, and various asset classes that much more important for the 21st century investor.

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Comments

[Davewmart:]

The US stock market seems likelier to track the performance of the Japanese stock market since 1990 in the years leading up to 2020.
The only probable way the levels you suggest will be reached is if hyperinflation takes off, and so the stocks are still worth in purchasing power less than today.

Jul 08 03:04 PM

[J. Crighton:]

Or another world war wipes out the production base of many of our competitors.

Jul 08 03:40 PM

[Jasper M:]

Might want to adjust those numbers to take into account an initial c. 90% drop, a la' '29 - '32.

Jul 08 04:14 PM

[Prudent Man...:]

On Jul 08 03:40 PM J. Crighton wrote:

> Or another world war wipes out the production base of many of our
> competitors.

Now that is silly. What if we are the losers. Remember those destroyed buildings after 9/11 and the economic dislocations?

Jul 08 05:41 PM

[richjoy403:]

"Seems likelier to track Japan" (1990-2020?).
"Another world war" (WW-IV?).
"Adjust for a 90% drop" (a la' '29-'32).

None of us know where the market will be in 2020, or 2050, but those comments represent A radical fringe who extrapolate an project a small period to represent a much greater period.

Though the S&P500 is by far the better measure, the DJIA will almost certainly average a return of 3.5% to 2020 (next 11 years), and is very likely to average 7%.

With respect to 2050 (next 31 years), there is no reason to doubt a 'reversion to the mean' historical return of 7%.

Furthermore, if you think the DJIA will NOT again achieve the 7% historical return (and I disagree, as [a] we were not an emerging market in the '90s; and [b] the DJIA is not a static measure, thus the argument regarding "large numbers" is not strong), you can give your own returns a boost by over-weighing Emerging Markets.

Jul 09 01:53 PM