Dow Smashes 20,000; What Should Investors Do?

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.

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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.

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.

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.