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Re: Bloomberg: U.S. stock futures could fall another 30%. Unprecedented loss of personal wealth.

On Thu, 24 Jul 2008 14:13:32 +0000, Mike wrote:

> On Wed, 23 Jul 2008 21:53:37 -0700, retrogrouch wrote:
>
>> That's utter nonsense. 1965 to 1982 was all downhill inflation
>> adjusted. Your dividends would not begin to cover the loss value.
>
>
> the dividends did cover the loss value.
>
> here's the CRSP annual returns (which include dividends) with calculated
> growth of $1.00 based on those returns (third column):
>
> 1965	0.1245	1.1245
> 1966	-0.1006	1.0114
> 1967	0.2398	1.2539

Do you have this data with separate values for dividends and
appreciation?  If I was to run a dollar-cost averaging scenario against
this data assuming that all of the appreciation shown was in the form of
price appreciation, I'd be over-stating the stock price, and under-
stating the actual returns.

Still, it gives a lower bound.  Assuming a fund that starts out at $1/
share, investing $1/year, over the 18 years, assuming all gains are
expressed as price increases, and there were no dividends (hence no
reinvestment of dividents) yields (second column is number of shares
purchased, the third is total number of shares, the fourth is the total
valuation of those shares):

1965   1.000   1.000   1.1245
1966   0.889   1.889   1.9108
1967   0.988   2.878   3.6087
1968   0.797   3.675   5.1185
1969   0.718   4.393   5.5983
1970   0.784   5.178   6.8629
1971   0.754   5.932   8.9884
1972   0.660   6.593   11.883
1973   0.554   7.147   10.995
1974   0.650   7.797   8.8201
1975   0.884   8.681   13.472
1976   0.644   9.326   17.923
1977   0.520   9.846   17.564
1978   0.560   10.40   19.782
1979   0.526   10.93   24.614
1980   0.444   11.37   33.918
1981   0.335   11.71   33.205
1982   0.352   12.06   41.528

Over the 18 years, you've invested $18, and end up with $41.  My TVM
calculator says that's a 9.29% return.  If the inflation numbers are
correct, $1 -> $3.06, then the average rate of inflation was 6.41%.

We've made two simplifying assumptions.  First that all of the return in
the data was in term of price appreciation, which we know it wasn't.  Our
assumption decreases the dollars available for stock purchase and
overstates the stock price, both of which reduce our return from what we
would have obtained in a more complete model.

And second, we've invested a constant dollar every year, when our
investment should have been increasing by the rate of inflation.  That $1
we invested in 1982 was worth a third of what that dollar we had invested
in 1965.

Both of these assumptions work in the direction of lowering our resulting
return to a significant degree.  But even with these, we've still
outpaced inflation by nearly 3%, over two of the worst decades in US
economic history.

You didn't provide the breakdown in your data between dividend returns
and price appreciation, so I can't do much there.  And I don't have the
year-by-year inflation data on-hand.  But if I assume a constant 6.41%
inflation rate over the entire period, I get:

1965   1.000   1.000   1.1245
1966   0.946   1.946   1.9684
1967   1.119   3.065   3.8442
1968   0.960   4.026   5.6076
1969   0.920   4.947   6.3039
1970   1.070   6.018   7.9758
1971   1.095   7.113   10.777
1972   1.019   8.133   14.660
1973   0.911   9.045   13.914
1974   1.137   10.18   11.517
1975   1.645   11.82   18.354
1976   1.276   13.10   25.183
1977   1.096   14.20   25.331
1978   1.257   15.45   29.382
1979   1.255   16.71   37.627
1980   1.127   17.84   53.189
1981   0.906   18.74   53.149
1982   1.014   19.76   68.018

That's a 13.95%, more than 7% above inflation.

Dollar-cost averaging works.

--
We must remember that law is force, and that, consequently, the proper
functions of the law cannot morally extend beyond the proper functions
of force.
- Frederic Bastiat

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