Now that the Dow Jones Industrial Average has remained comfortably above the key psychological 10,000 level for a couple of months, reader Carl G. from Idaho has suggested I compare the Dow 10K of 2010 with the Dow 10K of 1999, when it first crossed that barrier. Whenever I discuss the stock market and purchasing power -- that is, what you could buy in the real world if you sold your shares -- some readers inevitably protest that the DJIA's nominal number -- 10,000, 12,000, etc. -- is all that matters.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%I don't know about you, but for me, an investment is only as good as what it can buy in the real world. When stocks regain some nominal number that acts as a psychological level, it's wise to look past the cheerleaders who profit from investors getting excited by stocks to what we can actually buy with the invested funds.

In that light, it's no wonder stock market cheerleaders don't want us to look at Dow 10K in terms of our purchasing power: The results are sobering.

If we had sold the Dow in 1999 when it first touched 10,000, we could have bought 8,300 gallons of gasoline with the proceeds. If we sold the Dow now at 10,400, we could buy only 4,000 gallons. So, in terms of what we can get at the gas pump, our Dow 10K in 2009 is worth less than half of what it was in 1999.

I can already hear the howls of protest, so let me repeat: An investment is supposed to grow in real terms -- i.e.: purchasing power -- not just in nominal terms. If the Dow hits 20,000, but my dollar buys only 25% of what it did when the Dow was 10,000, then I'm much poorer in terms of my investment, regardless of the "new high" in the nominal Dow.

Any investment that loses purchasing power is, well, a loser.

Let's run through a few other real-world comparisons of Dow 10K 2009 and Dow 10K 1999:
(All quantities are approximations; prices varied throughout each year.)

  • Dow 10K 1999 bought 5,400 bushels of corn
  • Dow 10K 2009 buys about 2,750 bushels of corn
  • Dow 10K 1999 bought 4,000 bushels of wheat
  • Dow 10K 2009 buys about 1,900 bushels of wheat
  • Dow 10K 1999 bought 36 to 40 ounces of gold
  • Dow 10K 2009 buys about 9.4 ounces of gold

By just about any real-world measure, the stock market's value as reflected by Dow 10,000 is considerably less than the value of the Dow 10,000 in 1999.

Just for comparison's sake, let's do a similar analysis in terms of gold, which has risen from a low of about $265 in 1999 to a recent price of $1,100 an ounce:

  • One ounce of gold in 1999 bought 1/36th of a share in the Dow
  • One ounce of gold in 2009 buys 1/9 of a share in the Dow
  • One ounce of gold in 1999 bought 230 gallons of gasoline
  • One ounce of gold in 2009 buys 420 gallons of gasoline
  • One ounce of gold in 1999 bought 150 bushels of corn
  • One ounce of gold in 2009 buys 290 bushels of corn
  • One ounce of gold in 1999 bought 110 bushels of wheat
  • One ounce of gold in 2009 buys 210 bushels of wheat

According to the Bureau of Labor Statistics inflation calculator, $1.29 in 2009 dollars is equal to $1 in 1999. Yet when we compare prices of non-discretionary items such as gasoline, we find that the Dow lost over 50% of its purchasing power in the decade. Meanwhile, an ounce of gold buys 80% more gasoline than it did in 1999.

Critics will be quick to observe that stock dividends should be included in any calculation of total investment return, and I would heartily agree. Here are the total annual returns (including dividends, which are reinvested) of the broad-based S&P 500:

2000: -9.10%
2001: -11.89%
2002: -22.10%
2003: 28.69%
2004: 10.88%
2005: 4.91%
2006: 15.79%
2007: 5.49%
2008: -38.49%

Any way you calculate it, the U.S. stock market returned uneven gains since the end of 1999. A buy-and-hold strategy did not yield returns matching the rising prices of real-world goods.

Which investment maintained its purchasing power over the past decade? Clearly, gold was the superior investment. While there is no guarantee that gold will outperform other investments in the coming decade -- there is no guarantee that any investment will maintain purchasing power -- the point of the exercise is to judge investment returns and preservation of capital by real-world metrics.

We should also note that those who bought the Dow at the March 2009 lows around 6,500 and are selling their shares now at 10,400 increased their purchasing power considerably. From this point of view, the exercise doesn't so much "prove" stocks were a poor investment as much as suggest that buy-and-hold was a poor investment strategy.

Here are some sources for the above pricing data, courtesy of reader Carl G.:

* Weekly Retail Gasoline and Diesel Prices from the Department of Energy's U.S. Energy Information Administration

* Corn Historical Prices/Charts

* Illinois Average Farm Price Received Database

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