Dow 1 Million Before My Kid Retires

Before you dismiss this idea as an absurd, attention grabbing headline (it is), allow me to present a few facts and assumptions, and the objective of this story. I assure you that by the end of it you will agree with me, statistically speaking.

First, the objective of this exercise: to focus you to think long term and realize the power of compounding. Nothing new here, but when you do a few extrapolations, the numbers may amaze your perspective.

Second, the facts: the Dow has returned about 8% historically since 1928.

I crunched DJIA data from 1928 through 2007 during which it has gone from 300 to 14,000 (chart 1).

The annualized rate of return has varied based on the time span you use, as you can see in the chart below, but it is about 8% for the 80 year period. And that’s conservative. The annual returns for the post-war period are more like 12%.

The S&P has also returned an annualized 8% for the past 57 years, and a little over 5% (annualized) for the past 100.

Third, the assumptions: this is where it gets tricky. Agreed that past performance is no guarantee of future results, but the idea of taking large spans of time for the returns above was to smoothen out short term volatilities, depressions, recessions, irrational exuberances, boom and busts etc. You get the idea. Also (being the optimist that I am), I have assumed that we – as in mankind – don’t nuclear-wipe ourselves out or choke the planet. And if we hit the Singularity in 2050, then all bets are off.

So I am going to assume that the market will return a conservative 8% over the next couple of decades. Put another way, it means that the Dow will double every 9 years. Ah ha! With me so far?

The rest is merely extrapolation. Starting with a 14000 Dow in 2008, you can see below that the Dow will hit a million by 2064 (at the risk of dating my son, he will retire in 2070)! But wait, go out a bit more and you have a 10 million Dow by 2094 (chart below).

Do you think this curve is irrationally steep? I thought so too. So I put the past and future 80 year periods on the same chart with a log scale. Now do the next 80 years look like the past (chart below)?

So what do I recommend? Invest periodically with a discipline (don’t try to time the market), and be in there for the long term (as far as you can afford to). Even if you are a passive investor in a Dow (DIA) (IYM) or S&P (SPY) ETF, you will do fine in the long run. And, if I am not wrong, stocks have historically returned more than real estate. Now you may sleep better too.

Disclosure: The author is “long” the market

Comments

[Brian Croner]

That upward part of a parabola (going from low to high) appears to start in 1981, 1 year into the Reagan years. Reagan was a Republican gangster criminal, sparking the ridiculous and unsustainable deficit and debt figures that were beyond the stupidity of the Soviet Union's cold war machine to replicate. The debt of the US Government was manageable prior to 1981. Look now and it's impossible that the US ever pays off its debts without killing everybody with the loss of the value of the national currency we are legally forced to use. I suggest that we're looking at something of a parabola, not an indefinite exponentiation. It reflects debt levels poured into US stock equities. The part that makes the parabola go down, if it is a parabola, is how debt compounds if you don't pay off in full. The US goes into more debt just to pay interest. Savings accounts gain by compounding interest, just as debts grow by compounding interests.

So who wants a voucher for a personal training session or a general computer software consultation servicing?

[Kyle]

Wow, could this reply by Brian be more politically biased and full of simple mathematical errors. First off, the graph is not a parabola, it's exponential. Second, the graph doesn't "start" in 1981, it's an exponential curve that is viewed on a linear scale. If you view the data on a log scale, as in the last plot, you will see that the growth is a rather steady upward trend.

[Kyle]

Wow, could this reply by Brian be more politically biased and full of simple mathematical errors. First off, the graph is not a parabola, it's exponential. Second, the graph doesn't "start" in 1981, it's an exponential curve that is viewed on a linear scale. If you view the data on a log scale, as in the last plot, you will see that the growth is a rather steady upward trend.

[bushman]

asuming somany things.

Somehow looking at the Nikkei cant doesnt fit the logic, just its anyones guess but the Dow could also falter.

[rayden]

I think we may see Dow 1 million rather sooner with runaway inflation ;) I would look at some ratios, e.g. Dow/gold or Dow/average wage. Bet those are near-constant, long term.

[Doug Roberts]

Hi - Using the period you put forward - 1928-2007 - then the Dow returned 5% - using the numbers you put forward - without dividends. That is substantially different than 8%. You left out any discussion of dividends.