Dow Jones Demystified

This is a chart of the DJIA for the last 104 years (1897 - 2000). This first chart is on a linear scale.

This chart does not really provide much information. For instance, from 1928 to 1931 the market dropped from 300 to 77.9. This was a huge price drop of 75%, but it barely shows as a tiny blip in the chart. It is dwarfed by the gains made in recent years. That is the nature of a linear chart. But make no mistake, that 75% drop was incredibly painful. For a more accurate look at very long term charts, you need to look at logarithmic charts. These charts (called log charts for short) are constructed so that similar moves in percentage terms look the same, regardless of the actual price change. Here is the same 100 year period in a log chart.

In this chart you can see how significant the drop in the late 20's and 30's really was. You can also see that the price rise in the last decade has not been quite as extreme as it looks in the linear chart. One question we often get about these charts is about the 1987 crash. It doesn't show up on these charts, and many people think we have an error in our data or in the charts. Well, there isn't...the charts are accurate. This is a yearly chart that uses one value per year, which is the closing value of the Dow Jones Industrials on the last trading day of the year. At the end of 1986, the Dow closed at 1895.95. At the end of 1987, the Dow closed at 1938.83. The 1987 crash was devastating, but in that crash the market primarily gave up most of the gains that it had made earlier in the year. So on this yearly chart, it doesn't even show up.