| Nineteen months ago
I wrote a column celebrating the Dow passing the milestone level of 10,000. At the time
there was much rejoicing. The event was front-page news on every financial newspaper and
magazine, complete with cute headlines ("Honey, I Blew Up the Market").
Last week, we approached the milestone from the opposite
direction. In fact, for a brief time on Wednesday, the Dow was considerably below 10,000,
and it closed out the day at 9,975. Once again the press focused a lot of attention on the
10,000 milestone. Of course the mood was different — last year it was a party, this
year it was more like a wake. However, much of the text I wrote then is still relevant
today (and if I reuse a lot of that text, I'll be able to take off work early and watch
some C-SPAN). The key question was, and is, does reaching that milestone mean anything for
your investment plan?
The answer is no, it's just a number. There is no evidence
or reason to believe that hitting a particular number will cause a fundamental change in
the market. The stock market has a poor memory. Investors really don't care where they
have been, it's where they are going that counts. So the fact that a stock or index has
earned a particular return or reached a specific level has no relation to its future
course. Moreover, remember that the "Dow" is the Dow Jones Industrial Average
(DIJA) — not a traded security, but an index of only 30 stocks. No one buys and sells
the Dow — they trade the stocks that make up the Dow.
It's true, there are people who believe that the market has
specific predetermined trends that follow a particular numerical sequence or wave of
momentum. These people also believe that Shirley MacLaine should be Treasury Secretary.
There is no economic theory supporting the existence of such trends, and no shred of proof
that they exist. Hitting 10,000 will not force the Dow into some predestined groove. The
trend analysts get publicity because their ideas sound compelling and make it seem easy to
beat the market. But in the end, there is little difference between following their
theories and joining the Psychic Friends Network.
Milestones are always fun, and round numbers are noteworthy
because they are simple to comprehend. When we observe an accomplishment that is related
to a round number (70 home runs, one billion dollars of sales, 20 miles per hour over the
posted speed limit), we take notice, particularly if we feel involved in the
accomplishment. If you are reading this, it's likely that you are invested in the market.
So the Dow coming back to 10K is unfortunate for you (me too) because it means the market
has stagnated over the past year and a half.
But let's keep things in perspective. Remember that last
major birthday you had — the one that was a milestone? You turned 20, 40, 60 ... .
Perhaps friends and family threw you a party — or maybe colleagues at work draped
your office in black. You felt elated, or got depressed (actually, my birthday was last
Thursday — if you think birthdays are depressing for you, try having one when you are
among the 5 percent oldest employees in your company). But the key question is, in the
overall scheme of things, did the birthday really alter your life? The next day, did you
feel significantly older? More experienced? Closer to retirement? Chances are, it was just
another day in your life. The same holds true for the stock market.
Milestones are a good time for reflection — so let's
reflect. In its history, the stock market has provided close to a 10 percent rate of
return. That is a good benchmark on which to base your expectations. Over the past six
years the market has earned over 25 percent per year. That is certainly more than you
should expect in the future. Consider yourself fortunate to have experienced the recent
period of unprecedented equity growth, but don't let that good fortune alter your
investment strategy. On the other hand, year-to-date the Dow has lost 12 percent of its
value. But, do we really expect such a loss to continue over the next several years? Of
course not.
Now that the wake is over, let's get back to the business
of investing. Determine an investment policy commensurate with your goals and the risk
you're willing to take. Pick some solid funds and allocate your money to them in a way
that's consistent with your policy. Most of all, stay the course.
Then we can all sit around and wait for the Dow to hit
100,000. My econometric model says that should happen in the year 2029, although my
buddies at the Psychic Friends Network sense that 2020 will be the year. |
