In a previous blog I gave away an open investing secret – that you can make great returns simply by putting all your money in the simplest of all market indices, The Dow Jones Industrials Average, or Dow as we fondly call it. If you do that you will beat almost all professionally managed mutual funds or even private wealth funds (without special access or inside information). And you will beat all your friends, guaranteed.
Here are some historic numbers going back to 1940:
Average of returns when invested in the Dow for randomly selected holding periods of
5-Years: 70.02% (Annualized return: 11.20%)
7-Years: 110.64% (Annualized return: 11.32%)
10-Years: 193.02% (Annualized return: 11.35%)
20-Years: 741.83% (Annualized return: 11.24%)
Notice the consistent annualized return of about 11.3%, regardless of the holding period. In this study I took randomly selected 100 starting dates for the investment and held each one to the stated holding period adding in dividends when received. Then I averaged all the returns to get the above numbers.
The annualized expected return is the same regardless of how long you hold the investment. However here’s another interesting number – the number of the 100 holding periods where I lost money. Take a look:
Number of times I lost money (out of 100 random tries) for holding periods of:
Mind boggling. In the period from 1940 to 2011 we have had bubbles, crashes, wars, stagflation, the oil crises, the dotcom bust and the financial meltdown of 2008 – and yet only 2% of the time would you lose your money if you held the Dow for a randomly selected 7 year period! This reveals another interesting characteristic of the Dow. If you don’t need the money in the immediate future and are willing to lock in your investment for some years, you reduce the investment risk to bond-like levels without losing the annual return of about 11.3% compounded! (For the numerically minded, the annual sigma for the Dow held for 7 years is: 6%, versus 16% for a one-year holding period. 7-year corporate bonds are 4-8% sigma – with much lower returns, of course)
Below is a chart showing returns for 7-year holdings since 1940 (buying the Dow at the beginning of each year and selling at the end of 7 years – including dividends, of course):
As you can see we had only one period out of 64 where we lost money – in the seventies malaise – and even that was a small loss.
Over a 20-year holding period the chart was even more amazing. We never failed to double our money in any period!
So the moral of the story – if you can afford to lock up your money invest it in the Dow, reinvest the dividends and forget it. You will get the benefit of highly reduced risk due to time diversification and you will most likely beat all professionally managed funds. You will have to spend minimal time managing your money and can go on and have a life free of worry.
If you are a twenty-five year old starting a career say and want to contribute regularly to an IRA, where should you invest your money? REIT’s, Palladium futures, gold coins, Google or Netflix? No, invest it in the boring index, the Dow. By the time you are 60 and eligible to withdraw you will have a fortune, accumulating tax deferred and compounding at an 11.3% annual rate through all the ups and downs of the economy!