The Dow Jones has averaged near-zero returns since 1966

Let’s begin with the myth that the stock market has averaged 9 percent returns since forever. Its often quoted as a reason why its almost impossible to lose money if you buy and hold stocks. I disagree, and this article has some pretty basic analysis to show that maybe the stock market isn’t so great.

The Dow Jones Industrial Average is a basket of stocks with some doctoring of the numbers to adjust for dividends, stock splits and so on. Let’s see how it did since 1966.

Let’s imagine we bought the entire index in form of a mutual fund in 1966, for the low-low price of 950 bucks. I say mutual fund because everyone’s 401(k)’s are in mutual funds, so this is primary means that an ordinary person will invest in the stock market.


Wow! So in 46 years, your money went from 950 bucks to almost 13,000! You’re rich, right? Well, hang on there a second.

Mutual funds frequently charge about 1% annual fees, and you will pay taxes on that $12,000 gain, but only in the year that you sell. Lets assume, in that selling year, that you pay at the capital-gains rate of 15%. So, I reworked the numbers and below is a comparison between the original chart that just shows how the index did, and how your money would have performed under the burden of taxes and fees.


Wow! That’s like half of your money just went down the toilet to pay the Feds and the stock brokers. Well, you still did okay, since your 950 dollar investment still went up to like 6500 bucks, right? Well, not so fast, you see, a dollar in 1966 really bought a lot more than it does today. For instance, a deluxe Corvette cost around $4000 dollars. So, I’ve adjusted for inflation, using government generated statistics that are commonly regarded to be a gross understatement of reality. But, to be as conservative as possible, I used official statistics.


Whoa. Hang on there. That red line is so flat and tiny compared to the huge blue line soaring overhead, I can barely tell if I made money. So lets see that line, all by itself.


That clarifies it. What this graph pretty clearly shows is that from 1966 to the present, investing in the Dow was a money-losing proposition. For the brief dotcom boom of 1996-2000, the stock market was a great deal, more than doubling in real value, AFTER taxes, fees and inflation. Excluding these couple years, though, the stock market has been a money-losing machine for nearly 50 years. In the past 13 years, the market lost 25% of its value between taxes, fees and inflation.

So, I’m not sure where the stock market cheerleaders get their numbers, but mine tell a very different tale.

Published in: on December 8, 2012 at 6:16 pm  Comments (4)  

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4 CommentsLeave a comment

  1. There’s a fatal flow in your calculations. You would pay the 15% tax only when you remove the money from your 401K, and not every year as you assume here. So if you invested in 1966 and take the money in 2012, you would get 12000-1800 = 10200.

    Of course, you would pay less than 15% because you would be a lot older than in 1966 and you’d be in a lower tax bracket.

    • I only included a 15% tax in the year sold. The graph showing taxes and fees imagines the result if you sold in 1966,67,68,69, etc, but it does not subtract 15% compounding every year. It does include a 1% fee compounding every year, however.

  2. Rerun the calculations showing the money in a money market account. Bet the loss would have been much greater! All the more reason for people to push for tax reform. People should never have to pay taxes on their savings or investments it is a disincentive to save and rely more on a social security program that is bankrupt.

    • PS: Your calculations failed to note that the DOW Jones Index does NOT take into account all of the reinvested dividends and compound growth (total return) that you would have received by owning the basket of 30 stocks or a mutual fund. But yet you are adjusting for taxes. Compound growth is the most powerful way to grow your investments over time. None of the market Indexes compute the Total Return – adjust for the reinvestment of dividends and capital gains.

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