How to Make $61 Million, Slowly

Why is the Dow Jones Industrial Average probably the most widely watched financial measure in the world? One reason is that U.S. stocks have been a solid investment.

The accompanying bar chart shows the returns provided over the years by stocks and other investment assets, and compares them with the rate of inflation. Of course, stock-market returns fluctuate violently from year to year and even from decade to decade. But measured over long spans, the return from stocks has hovered near 10%.

The Dow Jones Industrial Average has provided a total return of 9.47% a year, including reinvested dividends, since March 31, 1900, according to Ned Davis Research Inc., in Nokomis, Fla. The average, celebrating its 100th birthday this year, began four years earlier, but good dividend information is unavailable for the pre-1900 period.

A person who invested $100 in the Dow industrials in 1900 now would have more than $61 million. That is testimony not only to the average's good performance, but to the tremendous power of compounding over long periods.

According to Ibbotson & Associates of Chicago, average compound annual investment returns have been 12.5% on small stocks from January 1926 through August 1996. Over the same time, the average return has been only 5.2% on intermediate-term bonds and 3.7% on Treasury bills. Real estate, measured over a slightly different period, has provided an average compound annual return of 11.1%.

For the past 20 years, Ibbotson figures that small stocks have returned an average of 18.5% a year and large stocks 14.2%. That compares with 10.7% for commodities, 9.8% for bonds, 7.3% for Treasury bills, and 5.8% for gold. Inflation during the 20-year period averaged 5.2%.

Ibbotson uses Standard & Poor's 500-stock index to measure large-stock returns, but the results aren't much different for the Dow industrials. According to Ned Davis Research, since the S&P 500 was invented in 1926, it has returned 10.47% a year, and the Dow industrials 9.99%.

-John R. Dorfman