The Logic And Emotion Of DOW 20,000

As I write this, the Dow Jones Industrial Average (“the DOW”) is on the brink of breaking through 20,000. This has never been done, and feels like a meaningful milestone. But what does it really mean? I thought we’d touch on a few brief thoughts as we venture into uncharted market territory.

First, what is the DOW, exactly? In short, it’s a proprietary index that tracks the stock prices of 30 large publicly-traded companies. Many people are surprised that it tracks only 30 companies, but the financial and news media speak of it as if the DOW is the entire stock market. It’s not, but because of the size of the companies on the DOW, it has historically served as a decent proxy for the larger stock market.
I’ve heard a number of people say that a new all-time high for the DOW means that it has to drop in value soon. “It simply can’t stay that high” they reason. While a big drop might happen, nobody knows for sure when the next recession or market decline will occur. In fact, there’s no logical reason why breaking through 20,000 would trigger a sell-off, ‘just because.’ Think back to when the DOW first crossed the 10,000-point barrier in March of 1999. By May of 1999, just two months later, the DOW broke through 11,000!
Since the DOW tracks only 30 companies, there are MANY sectors of the market that the DOW does not represent. These would include small cap companies, mid cap, international, and bonds. So for highly-diversified investors, the value of the DOW only represents a portion of their exposure to the markets within their portfolios.

Naturally, I look forward to the DOW growing from here. Long-term, it will grow substantially, to 30,000, 40,000 and beyond. What we just cannot predict is the path it will take. Therefore, a long-term focus, solid investing fundamentals, and a whole lot of patience will be required to reach new heights, and sustain future declines.

And on that note, here’s the rest of the story…I mentioned the DOW broke through 10,000, then 11,000 in two months. Well, it was down to 7,701 by September of 2002, climbed back to over 14,000 in 2007, only to fall to a low of 6,443 on March 9, 2009. So while long-term trends look really great, short-term fluctuations are often gruesome.

When the DOW crosses 20,000, let’s remember that it’s okay to celebrate, but some cautious optimism may be in order. As is always the case, consider how much risk you’re taking in your portfolio, whether your retirement income sources are secure, and your expenses reasonable. For if what goes up, must come down is true, make sure you have a safety net in place.