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historic DJA
Since I have not been able to post a reply for several days (keeps saying to wait), here is my analysis.
Based on my research, and math, if the Dow had been 1000 in 1966 and you held until 2006, based on the CPI, it would have had to reach 6177 to keep pace with inflation. Based on 13,000 DOW, that would suggest to me that your money would have not only beat inflation, but by a wide margin. However, had you kept your money in a savings account, $1000 dollars and had averaged 8% interest over the years (an assumption on my part, certainly not possible from 66 to 76) you would have $6659.80 in your account today. Barely keeping pace with inflation. And, you would had paid tax on that interest over the years while paying only capital gains on the stock over your base. Is this incorrect?
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Re: historic DJA
^^^
Basically, when adjusted for 'purchasing power' via the CPI, the 'purchasing power' of the DJIA has slightly more than doubled in 40 years. This is based on a 6.5:1 devaluation factor due to 40 years worth of inflation. In terms of after tax gains, you're looking at something slightly less than a doubling of 'purchasing power' at today's 15% cap gains tax rate. However, there is no guarantee that the GWB cap gains tax rate cut will still be in effect 3-5-10 years from now, which would adversely effect future projections. Historically the cap gains tax rate ratio versus the tax rate on ordinary income has been higher than it has been during the past few years.
On the other hand, your 8% interest earnings before tax example, less 20% income tax per year = a 6.4% 'real' interest rate. After 40 years this would yield somewhere around $12,000 depending on how the interest is compounded. Applying the same 6.5:1 devaluation factor due to 40 years worth of inflation, and the end result is slightly less than a doubling of 'purchasing power' as well. In essence, the DJIA has pretty much equalled the performance of an 8% taxable interest rate investment over the past 40 years whether both are adjusted for a decline in 'purchasing power' or not - with the only significant difference being due to GWB's 'temporary' cut in the capital gains tax rate which is now in effect.
Your calculation is off because you do not include 'interest on the interest' ... try it for yourself at - scroll down to the calculator box and plug in $1000, 6.4% and 40 years
PS if your responses 'hang up', hit the 'go advanced' button - and then hit 'save changes' from the advanced screen
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