Dow 20,000 - What Does It Mean?

January 25, 2017

 

The financial media is completely focused on the Dow reaching 20,000, an all-time high. It's important for investors to realize that while seeing the Dow hit 20,000 for the first time will be a psychological milestone, it's really not that significant.

 

If you think about it, there's no more reason to celebrate Dow 20,000 than any other number that was recently reached for the first time. 

 

Also, keep in mind that the Dow only represents 30 of the thousands of stocks that make up the broader US equity market. Because it only represents 30 stocks, outsize moves in any one of its components can have a big impact of the Dow. From example, the surge in shares of Goldman Sachs (which has benefitted recently from expectations of less regulations and higher interest rates) has contributed about one-third of the Dow's recent 1,000 point move since hitting 19,000 back on Nov. 22. 

 

 

It is also worth pointing our that 1,000 point moves for the Dow aren't what they used to be. When the Dow doubled from 1,000 to 2,000 which it hit in 1987, that move represented an 100% increase, but an increase from 19,000 to 20,000 only represents a 5.26% move. This example highlights the silliness of keying in on arbitrary milestones. 

 

The best advice we can give for Dow 20,000 is to stay focused on your financial goals. This advice will also hold true at Dow 25,000, Dow 30,000, and any other index-related milestones that may be reached during your lifetime. We are not sure if the market will continue to set new records in the next few weeks or months, but we are confident that the market will continue to set new all-time highs in the future. Investing should not be about index returns, it is about attaining your long-term financial goals. 

 

Bottom Line: While you're likely to see headlines celebrating Dow 20,000, it shouldn't have any effect on your investment strategy. 

 

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