Dow Smashes 20,000; What Should Investors Do?
Investors feeling anxious as the Dow breaches a huge milestone aren’t thinking about stocks in the right way: long term. A little history lesson could calm their nerves.
As the Dow broke through the seemingly magical milestone of 20,000 in trading on Wednesday, some clients are asking me what they should they do now with their investments. My short answer is “enjoy the ride.” Best to view the milestone as a roller-coaster-like ride to a much higher number. Rather than bore you with technical analysis referencing P-E ratios, charts and trends, it may be more interesting to view the big picture.
When people ask me if the stock market is going to go up or down, my answer is “yes.” I have zero idea which way the Dow is going in the short term. However, I’ll bet it will be significantly higher 10, 20 and especially 30 years from now, and isn’t that what matters if you are a true investor? Why do you care about the stock market’s next move unless you are getting ready to sell? Could you imagine if there were a sign over your garage door that displayed the value of your home and it was updated daily? It makes no difference what that price is until you are ready to sell. It should be the same with your investments.
The difference between investing and speculating is time in the market. For most people, having money invested to generate retirement income is far and away their largest and longest-term goal. The time horizon for your retirement nest egg is not from now until you retire, but rather your full life expectancy, because you will be drawing from it until you die. Therefore, it’s correct to think very long-term.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Some historical perspective may be helpful. I started in this business 30 years ago and saw the Dow close at 1739 on Black Monday in October 1987. Despite many major events since then, including 9/11 and the Great Recession, the Dow is more than 10 times higher now than it was in 1987. If I would have proclaimed 30 years ago that the Dow would be at 20,000 today, people would have assumed I was out of my mind. What if the Dow had similar cumulative growth the next 30 years? Ten times the current Dow level would put the Dow at around 200,000 in 2047!
As exciting as Dow 20,000 sounds, it should also be viewed as a percentage change. A 1,000-point move doesn’t mean what it used to mean.
Dow 2000 to Dow 3000 | 50% change |
Dow 9000 to Dow 10,000 | 11% change |
Dow 19,000 to Dow 20,000 | 5% change |
Obviously, a 1,000-point move in the Dow means less and less when viewed as a percentage. The table below illustrates just how the Dow would rise based on different average annual returns.
Today Dow 20,000 | 4% annual increase | 6% annual increase | 7% annual increase | 9% annual increase |
---|---|---|---|---|
Dow in 10 years | 29,604 | 35,816 | 39,343 | 47,347 |
Dow in 20 years | 43,822 | 64,142 | 77,393 | 112,088 |
Dow in 30 years | 64,867 | 114,869 | 152,245 | 265,353 |
Of course, the Dow never has and never will take a straight line up, and the future value is completely unpredictable, but even the pessimist who assumes a substantially lower long-term growth rate of 6% (vs. the historical rate of 8-10%) should be excited about the long-term possibilities. Investing is for the long term. Those in or near retirement should keep in mind that their real investing time horizon is their life expectancy. You need your portfolio to keep up with increasing costs such as health care.
In designing a portfolio, it’s important to diversify and own different asset classes for the purpose of potentially minimizing losses during the down time. By minimizing losses, hopefully you will hang in there and not panic sell when your portfolio is down. This is critical to long-term investing success. The worst thing you can do is to invest in stocks (or any investment that fluctuates) without being able to stomach the volatility that comes with it. The Dow has had many significant losses over its history. Yet those have always been temporary while the gains have been permanent.
Strategic diversification into specific asset classes that tend to move in different directions is usually a good idea to help make the downside stock market moves more palatable. History has proved that time is your best friend as a stock investor, and despite many uncertainties and some negative returns along the way, the future for the Dow is bright.
Cheers to 20,000 and I look forward to celebrating Dow 50,000 or even Dow 100,000 in our lifetime!
Brad Rosley, CFP® , has been president of Fortune Financial Group (FFG) since 1996. FFG runs a virtual planning practice working with clients from all over the country. Rosley specializes in helping clients successfully navigate retirement related planning goals and construct investment portfolios to meet their personal life goals.
Brad Rosley, CFP®, has been president of Fortune Financial Group (FFG) since 1996. FFG runs a virtual planning practice working with clients from all over the country. Rosley specializes in helping clients successfully navigate retirement related planning goals and construct investment portfolios to meet their personal life goals. His book "Beyond Money" made the Amazon best-seller list in the summer of 2018.
-
Use An iPhone? You May Be Hearing From A Class-Action Lawsuit Group
A handful of suits against the iPhone maker seek to crack down on everything from app store purchases to messaging.
By Keerthi Vedantam Published
-
Capital One/Discover: What's In Their Wallet For You?
Push back on Capital One's planned merger with Discover is growing with one group of consumer advocates calling for a public hearing.
By Keerthi Vedantam Published
-
Should You Enroll in Medicare if You Still Have a Job?
This question is being asked more than ever these days, so here’s what you can do when it comes to making Medicare decisions while you’re still working.
By Jae W. Oh Published
-
Three Big Ways That Life Insurance Can Be a Lifeline
Life insurance not only provides a safety net for loved ones and leaves behind a lasting legacy, but the cash value can also help during financial hardship.
By Steve Sugumele Published
-
Romance Scams That Target Older Adults Rising: What to Do
Here are some tips to help you avoid falling for a scam, especially when a scammer tries to prey on your affection.
By Patrick M. Simasko, J.D. Published
-
Lessons Learned From Britney Spears’ Financial Conservatorship
The pop star’s recent memoir reveals the toll her involuntary conservatorship took on her and spotlights the drawbacks of these legal arrangements.
By Stacy Francis, CFP®, CDFA®, CES™ Published
-
Four Things to Know About Managing a Loved One’s Finances
Figuring out when it’s time and knowing how to talk about it are just the start. You also need info about estate plans, insurance and health care decisions.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Three Tax-Smart Strategies for Real Estate Investing
Opportunity zones, Delaware statutory trusts and real estate income funds can help investors maximize gains and mitigate taxes.
By Dwight Kay Published
-
Can Language Apps Teach You to Speak a Foreign Language?
Your expectations might be too high if you think an online language platform can teach you to have a meaningful conversation in a foreign language.
By H. Dennis Beaver, Esq. Published
-
Avoid Surprises: Don’t Procrastinate on Your Taxes
You really should start thinking about next year’s taxes immediately after filing this year’s. Better tax efficiency could save you some serious dough.
By Jared Elson, Investment Adviser Published