The stock index that we have all watched for the longest and still gets quoted far more often than the S&P500 Index is the good old Dow Jones Industrial Average. It's been around for a long time and it has on major problem, that it is a price-weighted index. Why is that a problem? The higher the stock price, the bigger the impact on the index. Low-priced stocks barely move the index while high priced stocks move the index dramatically.
What I heard last night from a good friend was the headline above, where my friend said "Buy stocks because they always go up." That line of thinking really scared me because it showed a strong bias of belief, which is likely reinforced from the last 10-12 years where stock have been able to rebound from a strongly supportive Federal Reserve and global central bank policies to make capital available cheap for all to invest and spend.
Which brings me to the graph here of the DOW JONES INDUSTRIALS DIVIDED BY INFLATION. I did NOT account for dividends in this analysis and they are miniscule NOW, but were much higher in the past, reaching well over 3% many times in the past. Sorry the data isn't PERFECT for you.
My point is to show the volatility that you need to ACCEPT IF YOU BUY STOCKS and hold them. You need to EXPECT this level of movement against you or else you wont be able to tolerate the roller coaster ride.
Look at the size of the drops and you can see that IF you were ON MARGIN during any of those drops that you might have lost your entire portfolio in those corrections. The lesson? Don't use "too much" margin because it can take you out of the game. It's similar to driving too fast and crashing your car. The goal here is to stay in the market and not get shaken out.
Side note: I created this chart several years ago and just added the "declines" to highlight them for my dear friend. The next time you hear someone talk about "volatility" and "drawdowns" you can point them to this chart and discuss it with them.
If you are teaching people how to invest for their retirement, they can look at this chart and see that big declines are opportunities to invest at low prices. We all need to learn that stock prices don't go straight up, but they often do go straight down in short periods of time.
Look for the 1987 crash in this chart and see if you can find it. You might be surprised to see what COLOR that bar was for the year 1987. What do I mean? A bar (year) that has a HIGHER HIGH and a HIGHER LOW is colored GREEN for an UP YEAR. A bar (year) that has a LOWER HIGH than the year before and a LOWER LOW than the year before is colored RED because it is a down-year. The other bars are colored BLACK for the other TWO types of bars (inside year, outside year).
I hope you enjoyed this chart and will find value in the information it has in it.
Best regards,
Tim West
10:26AM EST 6/9/2021
What I heard last night from a good friend was the headline above, where my friend said "Buy stocks because they always go up." That line of thinking really scared me because it showed a strong bias of belief, which is likely reinforced from the last 10-12 years where stock have been able to rebound from a strongly supportive Federal Reserve and global central bank policies to make capital available cheap for all to invest and spend.
Which brings me to the graph here of the DOW JONES INDUSTRIALS DIVIDED BY INFLATION. I did NOT account for dividends in this analysis and they are miniscule NOW, but were much higher in the past, reaching well over 3% many times in the past. Sorry the data isn't PERFECT for you.
My point is to show the volatility that you need to ACCEPT IF YOU BUY STOCKS and hold them. You need to EXPECT this level of movement against you or else you wont be able to tolerate the roller coaster ride.
Look at the size of the drops and you can see that IF you were ON MARGIN during any of those drops that you might have lost your entire portfolio in those corrections. The lesson? Don't use "too much" margin because it can take you out of the game. It's similar to driving too fast and crashing your car. The goal here is to stay in the market and not get shaken out.
Side note: I created this chart several years ago and just added the "declines" to highlight them for my dear friend. The next time you hear someone talk about "volatility" and "drawdowns" you can point them to this chart and discuss it with them.
If you are teaching people how to invest for their retirement, they can look at this chart and see that big declines are opportunities to invest at low prices. We all need to learn that stock prices don't go straight up, but they often do go straight down in short periods of time.
Look for the 1987 crash in this chart and see if you can find it. You might be surprised to see what COLOR that bar was for the year 1987. What do I mean? A bar (year) that has a HIGHER HIGH and a HIGHER LOW is colored GREEN for an UP YEAR. A bar (year) that has a LOWER HIGH than the year before and a LOWER LOW than the year before is colored RED because it is a down-year. The other bars are colored BLACK for the other TWO types of bars (inside year, outside year).
I hope you enjoyed this chart and will find value in the information it has in it.
Best regards,
Tim West
10:26AM EST 6/9/2021
Kommentar:
Just by looking at this chart:
WHAT % of 10-Year Holding Periods have generated "GREATER THAN RISK-FREE RETURNS IN THE STOCK MARKET"???
First, you'd need to know what RISK-FREE RETURN means. Risk-Free is the rate of interest you would earn if you loaned your money to the US Gov't in the form of a money-market-mutual fund or by buying "T-Bills" in various maturities from 1 month to 1 year.
The hard part is that it is EXTREMELY difficult to determine the answer to that question by looking at this chart because you don't have the "risk-free-rate" to compare to.
What I can add is that the RISK-FREE RATE was EXTREMELY high in the 1981-1996 time frame and has been low since then. What does that mean? You could have earned a high rate of return by owning a zero-risk product, but you would have lost to inflation, which destroyed the value of your investment slowly and steadily over the years.
If NONE OF THIS MAKES SENSE, then ask me a question. There is SO MUCH to learn about investing from understanding expectations, position sizing (how much of something to own), and how to increase/decrease your position over time.
Ask me a question and I'll add to this thread.
Tim 8:15AM EST 6/10/2021
WHAT % of 10-Year Holding Periods have generated "GREATER THAN RISK-FREE RETURNS IN THE STOCK MARKET"???
First, you'd need to know what RISK-FREE RETURN means. Risk-Free is the rate of interest you would earn if you loaned your money to the US Gov't in the form of a money-market-mutual fund or by buying "T-Bills" in various maturities from 1 month to 1 year.
The hard part is that it is EXTREMELY difficult to determine the answer to that question by looking at this chart because you don't have the "risk-free-rate" to compare to.
What I can add is that the RISK-FREE RATE was EXTREMELY high in the 1981-1996 time frame and has been low since then. What does that mean? You could have earned a high rate of return by owning a zero-risk product, but you would have lost to inflation, which destroyed the value of your investment slowly and steadily over the years.
If NONE OF THIS MAKES SENSE, then ask me a question. There is SO MUCH to learn about investing from understanding expectations, position sizing (how much of something to own), and how to increase/decrease your position over time.
Ask me a question and I'll add to this thread.
Tim 8:15AM EST 6/10/2021
Kommentar:
Most people look at the yearly chart of the stock market in this form and it is misleading because a 100% gain and a 50% loss feel ENTIRELY DIFFERENT together with the idea that 'inflation eats away at the value of your investment' steadily over time. In 30 years you will lose more than half of your investment with inflation of only 2.5%/year
Most people look at the yearly chart of the stock market in this form and it is misleading because a 100% gain and a 50% loss feel ENTIRELY DIFFERENT together with the idea that 'inflation eats away at the value of your investment' steadily over time. In 30 years you will lose more than half of your investment with inflation of only 2.5%/year
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