DJIA, one of first stock indexes in America, beginning from 1890s, consists of 30 companies in the US.
From middle 1897 β 2007, DJIA Index went from 30 β 14,000 points, reaching the compounded annual return of 5.7%. If we put $1 into DJIA in the middle of 1897, we would have US$467 in October 2007.
At the bottom of the market in March 2009, when DJIA reach the low level of 6600, the compounded annual interest rate would be 4.8% annually for 114 years.
Although DJIA has been subjected to ups and downs, it has got increasing trend over the long run.
We can see that over the century, going through boom and burst with all disastrous event such as World War I, II, Great Depression, Oil Shocks, Black Monday, and other depressions as well, investors on average over the long-run would turn out to be fine. The sensible investors, as history has shown, to jump in when there are lots of blood in the market, and hesitate to invest when the market is getting to the ridiculously high level. As Warren Buffett stated: "Be fearful when others are greedy, and be greedy when others are fearful".
From middle 1897 β 2007, DJIA Index went from 30 β 14,000 points, reaching the compounded annual return of 5.7%. If we put $1 into DJIA in the middle of 1897, we would have US$467 in October 2007.
At the bottom of the market in March 2009, when DJIA reach the low level of 6600, the compounded annual interest rate would be 4.8% annually for 114 years.
Although DJIA has been subjected to ups and downs, it has got increasing trend over the long run.
- 1925 β 1929 was the booming time of DJIA, running from 112 to 380 points (the gain of 240%). But right after that, Great Depression began at the end of 1929, DJIA decreased continuously in the period of 1929 β 1932, from 380 to 40 points (nearly the points 35 years ago). DJIA did not reach the highest level of 1929 until 1954 (25 years later).
- If we bought DJIA at Great Depression in 1932, when everything was black and really cloudy, at 80 (although it still got down to nearly 40 points, 50% decrease from buying point) and hold it for 5 years. Till 1937, when DJIA reached 185 points, the annual compounded return is 18.3%.
- In the period of 1970 β beginning of 1973, DJIA run from 640 β 1,140 points. At 07th Jan 1973, Alan Greenspan (he would become the chairman of Fed) said: βItβs very rare that you can be as unqualified bullish as you can nowβ. But only short time after that, 1973 and 1974 were the two worst years from the Great Depression time. DJIA went down from 1,140 to 580.
- If we bought DJIA in 1974 at 600 points (although it went down further to 580), and kept it for 4 years. In 1978, it reached 900 points, giving us the annual compounded return of 10.7%
- In 1987, DJIA went from 2,700 to 1,740 points, especially on the day when people mentioned Black Monday; it decreased 22.6% in value within a day.
- If we bought DJIA at 1,900 in 1987 (although it went down further to 1,740). 5 years later, at some point in 1992, it reached 3,400. So the compounded rate of return is 12.3% per annum.
- From 1995 β 1999, DJIA rocketed from 3,800 to 11,200 points (with the gain of 195%). From the year 1999 to 2002, combined with effect of tech stock busts, it gradually went down to 7,200 (the loss of 36%).
- If we bought DJIA in 2002 at 8,000 (although it decreased further to 7,200), kept it for 5 years, in 2007, the value would be around 13,500, reaching the annual compounded interest rate of 11%.
- A new period beginning from 2003, the mortgage craze began, DJIA hit its new high at 14,000 (the gain of 84%). As the housing bubble began its burst sign at the end of 2007 with Bear Stearns reported huge loss and it said it had to write down the holding in mortgage and mortgage-backed securities. From the middle of 2007 to Nov 2008, DJIA went from 14,000 to 8,000 points (the decrease of 43%), and it went further to around 6,600 points in March 2009.
- If we bought DJIA at around 8,000 points (even it decreased further to 6,600 points) in Nov 2008, and held it until now, closing at 10,770 points today (25th Sept 2011), and let assume if it plunged to 10,000 points (decreased of 7.7% further) in Nov 2011, we would have the return of 7.72% annually.
We can see that over the century, going through boom and burst with all disastrous event such as World War I, II, Great Depression, Oil Shocks, Black Monday, and other depressions as well, investors on average over the long-run would turn out to be fine. The sensible investors, as history has shown, to jump in when there are lots of blood in the market, and hesitate to invest when the market is getting to the ridiculously high level. As Warren Buffett stated: "Be fearful when others are greedy, and be greedy when others are fearful".
