Curious about the long term price behavior of the stock market, I loaded up a yearly chart of the Dow Jones Industrials. I went with the Industrial Average because its history goes farther back than any other Index. On the TC2000 platform, they have yearly data all way back to 1915 which was older even that TradeStation whose data starts in 1920.
Taking a look at the data, there were a few times when the index was cut in half, and another time when it was cut by about 90% when the Dow went from a high of 386 back in 1929 to a low of 40 in 1931. More recently in 2007 we had more than a 50% haircut when the Dow went from a high of 14,198 back in 2007 to a low of 6,469 in 2009 only to bounce back and make a new all time high within 4 years.
Aside from the occasional haircut, the overall direction is decidely positive, from the lower left to the upper right of the chart as Dennis Gartman would say. Based on a simple analysis, the average gain over the 98 year period from 1915 to 2013 is 7.93%. So I did a simple estimate of what average would look like into the future based on continuation of the current trend, and came up with these numbers:
This chart shows that the Dow will reach 20,000 before the year 2019, 30,000 by 2024 etc.. until it reaches 100K by 2040. Some of these numbers look fantastical but its really just simple math and clearly i'm not going to win any awards for this research. Point is the stock market goes up over time and the Dow Jones Industrials is as tried and true and indicator as there is.
Based on all of this I have added to my ETF holdings in DIA and its now my largest position. I like the fact that the index is focused on the largest most successful companies. Also, the index is managed for growth as underperforming companies are kicked out, and new successful companies are introduced. In fact, of the original Dow-30 stocks, only General Electric remains.
Just to give you an idea of how much the index is changed, here are 11 of the 12 original components from the index when it was started by Charles Dow back in 1896:
American Cotton
American Sugar
American Tobacco
Chicago Gas
Distilling & Cattle Feeding
Laclede Gas
National Lead
North American
Tennessee Coal, Iron and Railroad
U.S. Leather
United States Rubber
With the exception of General Electric, every company has been reorganized or otherwise restructured. This is downside protection to avoid the situation where you get stuck with a dud of a stock since they generally get kicked out of the Index. Recent cases are Citigroup and General motors, both of which got kicked out of the index back in 2008.
Plan going forward is to add DIA on dips. And with a 2.4% dividend yield, its paying you pretty good while you wait.
Enjoy your weekend
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