It finally happened -- as we all knew it would. After much anticipation, the Dow has
passed the magical level of 10,000.
It was front-page news on every financial newspaper and magazine, complete with cute
headlines. There were (and will continue to be) analyses on how fast the Dow has
grown recently ("Honey, I Blew Up the Market"), discussions on its historical
significance in the American economy ("Dow: The Early Years"), and commentaries
on
how more people are paying attention to the market than ever before ("Dow Pop").
Can
a feature on "Biography" be far behind? The question is, does it 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. Participants 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 a specific level has no relation to its future course. Moreover,
remember that the "Dow" is the Dow Jones Industrial Average -- 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 pre-determined
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 hitting 10K is
nice for you (me too) because you have benefited from this growth.
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. 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 good time for reflection -- so let's reflect. In its history, the stock
market
has provided close to a 10% rate of return. That is a good benchmark on which to base
your expectations. Over the past four years the market has earned over 30%. 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.
Now that the party 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 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 2028, although my buddies at the Psychic Friends
Network sense that 2020 will be the year.
 Lummer's
Logic Archives
Scott L. Lummer, Ph.D., CFA, 401k Forum's Chief Investment
Officer, is a recognized expert in the investment field. He has conducted extensive
research on asset allocation, international investing, risk management, mutual fund
analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He
wants to know what's on your mind, so feel free to send him your questions about the stock
market! He'll answer as many as he can in his weekly column.
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