In case you have not heard, there is a stock market crash happening as we speak. Today, Friday October 10 2008 is going to be known as Black Friday, or something. I’m not sure if it is possible to put this into perspective in any sensible way, but I have two graphs to show you.

The first is a graph that puports to show cycles in the Dow Jones average after all kinds of adjustments are done. The main effects of these adjustment are to normalize secular (short term) variation by using a log scale, and the imposition of relative value lines, essentially adjusting for inflation. I’ve drawn the current crash to show that it is not as bad (to date) as the 1929 crash by about an order of magnitude (not that orders of magnitude have that much meaning…)

The second graph shows the Dow Jones since 1970. I think the point here is to define two things: What may be a new pattern (but it has only happened twice) of mega-bubbles and where the current bottom is in relation to the value of stocks not that long ago.


Of course, we don’t know what the bottom is, but you can print this graph out and carry it around with you and check every few hours over the next week..

Perhaps a weekend off from trading will settle things down a bit. But, if you had retirement plans for any time over the next two years, AND you voted for George Bush and the Republicans last election, well, you fucked yourself, didn’t you?


  1. #1 MartinDH
    October 10, 2008

    Bush/Republicans in 2000/2004 my ass.

    They just continued (with a vengeance) St. Ronnie’s implementation of Supply Side/Monetary macroeconomic theories. Trickle down my hairy ass…more like piss on from an ever increasing height (until the market tumbles…and in 2000 and now).

    Properly implemented Keynesian economics seems to be the best government’s best compromise between strict socialism and laissez-faire capitalism. It offers protections to society with freedoms to capital. Of course, growth rates are curtailed but then the lows are minimized.

  2. #2 Mimi
    October 10, 2008

    WOW! But how do you REALLY feel???

  3. #3 llewelly
    October 10, 2008

    Of course, we don’t know what the bottom is, but you can print this graph out and carry it around with you and check every few hours over the next week..

    Every few hours?
    Printed graphs don’t change that quickly. Unless you’ve got some hot new tech.

  4. #4 Greg Laden
    October 10, 2008

    No, no, no… I mean you take out your pen and update the graphic with the data coming over your tickertape machine.

  5. #5 Stephanie Z
    October 10, 2008

    Greg, do you have a source for the top graph? I’d like to look at exactly what they’re doing, because if I’m reading this correctly, it says that the DJIA, on average, keeps pace with inflation but with much more variability. That would have some pretty profound implications for how we think about investing.

  6. #6 Philip H.
    October 10, 2008

    I agree with Stephanie, though I have to say if it holds true then buy and hold is still a good strategy. Most folks I’ve read the last few years said that you should expect to hold at least 18 months once you purchase, and judging by graph 1, that would be about the time scale of the noise. Hum . . . . .

  7. #7 Greg Laden
    October 10, 2008


    Sorry, I should have included that … here:

    I interpret it differently. I think this means that if you hold inflation to a linear model then this is what DJIA looks like. I’m not sure though. I just liked it because it more or less shows real value over time.

  8. #8 Stephanie Z
    October 10, 2008

    Thanks, Greg.

    After looking at the source and the underlying actual numbers, it looks like the DJIA grows, on average, about 2% faster than inflation. That means that investment return assumptions used during my investing lifetime are inflated–not as much as I was afraid they were, but still significantly. If you’re using a calculator with a 3% inflation assumption, you shouldn’t use a return assumption of more than 5.0-5.2%. Most educational materials I’ve seen use a 6% assumption, with an 8% assumption as the optimistic scenario. That’s more than doubling the inflation-adjusted return. That’s awfully optimistic.

    I’ll have to play with those numbers some more and see what kind of effect that has on individual savings. I’ll also have to look at some different timeframes to see what kind of variance there is in average return for people retiring in different years.

    Of course, this all assumes that one has enough money to be saving for retirement.

  9. #9 Paul Hutch
    October 10, 2008

    To put some long term numbers to this situation, in October 1978 the DJIA was at 800. At the start of October 2008 it was over 10,000 (+1200%). The CPI (consumer price index) was 67 in October 1978, in August 2008 (most recent on it is 219 (+227%).

    So it looks to me like even if the DJIA drops to 4000 (the 1995 value) it is still far better than keeping cash in a mattress over the long run. 🙂

  10. #10 Stephanie Z
    October 10, 2008

    Paul, those are relatively short-term numbers, going from a lowish point to a highish point. It was great for people who used those dates to start and end their involvement in the market. For anyone else? Perhaps not so much.

  11. #11 Paul Hutch
    October 10, 2008

    Stephanie, those are 1978 to 2008 values, 30 years and not from a chosen low to a high. If I wanted to cherry pick I would have used 10/2007 when the DJIA was around 14000 rather than the 10000 at the beginning of this month.

    Look at the DJIA for any period of 20 years or more and you’ll see that equities have the best long term returns. The notable exception was the great depression, it took 30 years to turn the corner then. A diversified equities portfolio is only a loser against inflation and some other investments if you use less than 20 years as an investment period (e.g. 1959 to 1974, 1965 to 1980, 2000 to 2008).

    October DJIA
    1928 = 300
    1938 = 154
    1948 = 177
    1958 = 580
    1968 = 940
    1978 = 800
    1988 = 2000
    1998 = 8500
    2008 = 10000

    The interactive chart at is a great way to see the DJIA data over the past 80 years (symbol = ^DJI). Set the chart to max time length then make a 20 year window and you can slide the window through the past 80 years. You’ll see every 20 year window period comes out a winner. Add the S&P 500 as a comparison and the chart shows as percentage gain rather than dollars.

  12. #12 Stephanie Z
    October 10, 2008

    Paul, I’m not saying you cherry-picked your numbers or that the DJIA doesn’t outpace inflation. I’m saying that the investment advice we’ve been given in the last few years has been based too much on recent history and has overstated the average long-term (30-50 year) returns. If people hold onto their assets into retirement, instead of buying a well-timed annuity, this is important for planning. The chart above is a nice example of what Buffet was talking about when he warned that our assumptions have been too rosy.