Thursday, March 24, 2011

100-Years of Inflation-Adjusted Stock Market History

When analyzing stock market performance over multiple years, it is important that you consider inflation-adjusted performance. The more years being evaluated, the more important it is to include the impact of inflation. If you don't adjust for inflation, you're comparing apples and bananas. Previously, I've suggested that you at least mentally factor in the impact; in this post, we'll update the 100-year stock market chart to make that "factoring in" explicit.

100-Year Stock Market Graph -- Inflation-Adjusted

100-year stock market history in  inflation-adjusted constant 2012 dollars

In the chart above (click to expand), the red line shows Dow Jones Index year-end closing prices in "then current" dollars -- as they were reported at the time. That is how you normally see them, and how they were displayed in my original 100-year stock market graph. In that original chart, you could see that the Dow is now more than 100 times higher than it was in 1900! But what does that really mean? Does it mean that if some (very) long-lived soul had invested $1 in the stock market in 1900 it would now be worth more than $100? Yes, but that's misleading because you're comparing apples and cumquats; the first amount is

Tuesday, March 15, 2011

100 Years of Inflation Rate History

Inflation can be devastating; while it has been under control for the past 25 years, there is no guarantee that it will remain so. Since this blog emphasizes long-term planning, it is important that we address the issue of inflation, and the impact that the declining purchasing power of the dollar has on our investments. For perspective, as always, let's first look at the past century.

U.S. Inflation Rates since 1900

Yearly change in consumer price index (CPI-U) 1900-2012
U.S. Yearly Inflation since 1900

The above chart shows the yearly rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U) for the past 100 years. By early 2012, prices were more than 28 times higher than in 1900 -- the CPI increased from 7.9 to 226.7. Phrased differently, a dollar buys 28 times less now than a dollar bought in 1900 (see inflation calculator). While inflation has averaged only 3% for the complete period, and also 3% since 1982, such subdued inflation has clearly not always been the case. The graph shows several periods where inflation rose to 10% or more. Here's a quick summary of inflation's impact on some key areas.

The Impact of Inflation: A Dollar Buys a Lot Less Than it Used To

Inflation increases the

Tuesday, March 1, 2011

March 2011 Stock Market Update

February, Year-To-Date & Recovery-To-Date Review
Note: Click here for April update with March 2011 stock market results

The market continues its remarkable recovery; in February the market again reached a multi-year high. The DJIA (Dow Jones Industrial Average) closed February at 12,226.34, after a late month pullback from its high close of 12,391.25 on February 18. The pullback was sparked by unrest in the Middle East and the resultant run-up in oil prices.

Here's a summary of the extent of the advances after this remarkable 2-year run:
  • From Prior Month Close of 11,892: The Dow is up 334 points (2.8%)
  • From December/EOY Close of 11,578: Up 649 points (5.6%)
  • From Recent Low of 9986 on August 26, 2010: Up 2241 points (22.4%)
  • From 52-Week Low of 9686 on July 2, 2010: Up 2540 points (26.2%)
  • From Crash Low