Reply #12: You are taking the point level of an index... [View All]

[Sammy Pepys]

...and trying to turn it into a raw dollar figure. But that's not how they're calculated. You can't turn a DJIA level of 11,722 into $11,722 and draw an inflation figure from that...it doesn't work that way. It's an index based on the prices of the stocks comprising it (in the case of the DJIA, 30), price-weighted and applied against a diviser to account for splits.

If you really want to devise a theoretical index average based on inflation, you have to adjust all of the stock prices in that index for inflation, price-weight them accordingly and then use the divisor (whether you'd use the current diviser or the one from the year you're comparing I'm really not sure...but divisors do change) to calculate a new average. You can't just pull the average and throw a dollar sign on it.

Another way to look at it: there are lots of indexes out there: S&P 500, NASDAQ, Russell. I'll bet you dollars to donuts that if you tried the same math with their averages to derive an inflationary rate, they wouldn't match.

Even with all this fun math though, you still probably won't get an accurate picture of actual returns versus inflation. I'd also wager that if you annualized said returns over five years, the stock market would likely have beaten the inflation rate.