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Dow 20,000! What’s Next?

January 25, 2017

If you are one to pay any attention to the financial media (If you’re not, good for you!) then you have probably heard that the Dow Jones Industrial Average finally moved past the 20,000 milestone on January 25th.  To put this into perspective, the index hit a low of 6,440 in March of 2009. That means the Dow has seen a 205% rally in a little less than eight years! [1] But what does this mean for us now? Is this a sign that stocks are on the rise, or does it mean they are overvalued and ready for a plunge? 

 

What is the Dow, really? 
First, we know not everyone is really sure what the “Dow” even means. The Dow, or the Dow Jones Industrial Average is an index of 30 large U.S. companies that was originally created by Charles Dow while he was an editor for the Wall Street Journal in 1896; though there were only 11 stocks initially. [2] He created the index to help investors track the performance of stocks as a whole, which was a difficult thing to do at that time. As you can imagine, today the 30 stocks that make up the Dow look pretty different as the U.S. economy has evolved. But the goal remains the same: to help investors gauge the performance of the U.S. stock market as a whole. We believe there are now better indexes to track market performance such as the S&P 500 or the Wilshire 5000. 


Where do we go from here?
Media outlets have been waiting for their chance to use “Dow 20,000” as a headline and to make new predications on where it will go next. A quick Google search will yield a variety of articles – some predicting the Dow to go to 40,000 while others say it could fall to 5,000. One thing the milestone should teach us is that, over time, it pays to be optimistic about the stock market. We will be the first to tell you not to try to guess where the market ends up by year’s end and if you hear someone that “knows” where the market will end up, be very skeptical of that advice. On the other hand, we have confidence that over the long-term, the market will continue to go up. Famous investor Warren Buffett echoed this sentiment in a recent interview where he dodged questions asking him to predict the market in the next year or two but said this about where it would ultimately go: "It's going to be higher 10 years, 20 years from now…” [3] We agree with Mr. Buffett and that is why we think stocks belong in most investment allocations in order to achieve real wealth accumulation over time. 


Build an Investment Strategy based on a Plan and Rebalance When Necessary
Instead of guessing when to jump in or out of the stock market, investors are better served establishing an investment strategy that fits their financial goals and their tolerance for risk. We believe there should be a purpose behind your investments. If you need to average a 6% rate of return over the next twenty years to retire, that might suggest one investment allocation while someone that only needs 3% could require a very different approach. Along the way, when certain parts of your portfolio see excessively large returns, it may be a good time to rebalance the portfolio to get back to your desired investment strategy. (See the article in the centerfold of the newsletter for more details on rebalancing). 


This means we want to be proactive with our investment approach, rather than reactive. When we are proactive and have purpose behind our investing we are being rational and strategic. When we are reactive we can be emotional and are more prone to mistakes. Many investors experience poor investment results by “selling low and buying high” even if they know they should be doing the opposite. A plan and purpose can help fight those urges. 


So we will join all of the predictors to say that the Dow will reach 40,000…. some day; just don’t ask me when exactly. But has history has shown us, no matter who is or isn’t in the White House, through times of peace and times of conflict, through “booms and busts” the market will push on. And that is what we want to be a part of. 


By: Mark Beaver, CFP

 

 


1 “Boom: Dow hits 20,000 for first time ever” http://money.cnn.com/2017/01/25/investing/dow-20000-stocks/index.html 
2 Dow Jones Averages: Overview https://www.djaverages.com/?go=industrial-overview 
3 “Warren Buffett Says US Will ‘Work Fine Under Donald Trump’” https://www.yahoo.com/news/warren-buffett-says-us-fine-064505509.html 
 

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