I Started Freaking Out

I read this tid bit on the Dow vs Gold. The basic premise of the piece is: that in terms of gold the value of American industrials has eroded and soon will be equal to what it was in 1929.

Here's an amazing fact: The Dow Jones Industrial Average today is cheaper than it was in 1966 in real-money (gold) terms. Despite all the talk of a “New Economy,” all we have witnessed is a paper revaluation, while the underlying corporate assets have deteriorated. Despite 40 years of supposed economic growth, the top 30 industrial companies of the United States have gone exactly nowhere in terms of their value in gold.

Now if that doesn’t get the old ticker pumping and motivate you for TSHTF, I don’t know what will. Before I restarted digging the bomb shelter and bunker, I got to thinking. The DJIA is only 30 stocks that change from time to time. What does a larger index look like, say the S & P 500. So I did the math.

The S&P has only been around since 1950 so I had to shorten up my time frame a bit. In Jan 1950 the index was 17.05 by Jan 2006 it was 1280.06. Using a base year of 1950 for inflation (CPI-U) the deflator in Jan 2006 had reached a whopping 319.76. Basically if it cost a buck in 1950 it now costs $7.75, now that’s inflation!

How does it compare? The average (median) Inflation rate for the last 57 years is 3.27% while the S&P index growth is 10.28% for the same period. Meaning that even factoring in inflation you still would be ahead 7.01% on the S&P.*

Over all in real dollar economic terms American industrials are suffering. I can’t dispute that. The total economic value of a larger cross section of US businesses isn’t nearly as gloomy as it appears. However, a 7% adjusted average returns in stocks isn’t as hot as the mid 90’s run up.

When calculating what you need in savings for retirement you might not want to use an average return of 12%, try something more conservative like 6%. This means you will have to save more to make your capitalization goals, and you’ll have to manage the portfolio more diligently.

*I saved my research as an excel file, if you want it email, you can check my math and method yourself.