When you adjust stock gains for inflation … uh-oh !

TakeAway: Adjusted for inflation, the Dow would have to rise 28% just to get back to 1999 levels.

* * * * *

Excerpted from WSJ: Adjusted for Inflation, Dow’s Gains Are Puny, Dec. 28, 2009

Stock analysts sometimes like to note that the Dow today is worth 27 times its value at its 1929 pre-crash peak, meaning that even if you bought at the worst moment, your stock still would be way up over time. In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak.

Many investors realize that stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was, because most people forget about the effects of inflation.

Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation.

In 1999 dollars, the Dow is only at about 8200 and would have to rise another 28% or so to return to 1999 levels. Using today’s dollars and starting at 10520.10, the Dow would have to surpass 13460 to get back to its 1999 level in real, inflation-adjusted terms.

All of this might be enough to put investors off stocks entirely, until they consider the long-term alternatives.

Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class: 4.5% a year. Stocks’ ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year).

Real-real home prices were unchanged over those 30 years.

Both short-term government bonds and commodities suffered losses.

Full article:
http://online.wsj.com/article/SB10001424052748703991304574621903850508632.html?mod=WSJ_hps_MIDDLEThirdNews