The Dow Jones Industrial Average (DJIA) reached a major milestone earlier this year when it finally surpassed the 20,000 hurdle. The event was widely ballyhooed by investors and media outlets alike. Almost immediately, articles and news stories questioning how much higher the index could go began to appear.
Our local newspaper even went so far as to write an article about a retired local stockbroker who was so certain that the Dow Jones Industrial average would reach 20,000 that he bought a vanity plate reading “DJ 20000” for his car: in 1999. Later in the article the retired stockbroker admitted, “I’m not sure that I’m much of a guru.” No kidding. I am almost afraid to pass this along since this retired stockbroker has had such poor luck with his past prognostications, but he recently purchased a vanity plate that reads “DJ 40000.” Hopefully it will not take another 18 years for his license plate to be in vogue again.
So what does the Dow index reaching 20,000 points really mean? In the grand scheme of things: not very much. For starters, the DJIA is an index comprised of thirty stocks (it grew to its current thirty stock size from its original twelve stocks that comprised it in 1928) that was created by Charles Dow and Edward Jones back in 1896. The DJIA was created to be a bellwether for industrial stocks and indicate the relative health of the stock market for a particular trading session, or series of trading sessions.
The composition of the Dow has changed numerous times over the years and none of the original twelve components remains in the index today. In fact, the stock with the longest membership in the Dow is General Electric, which was added in 1907. And while the Dow may be the most widely known market index, it is certainly not the best indicator of market health for large US stocks. That distinction belongs to the S&P (Standard & Poor’s) 500.
The numerical value of the Dow also has very little significance, intrinsically speaking. The Dow Jones Industrial Average at 20,000 points does not mean that the stock market is any more, or less, attractive for investors today than it was at 19,000 points. Despite what some technical analysts (market analysts who attempt to forecast market movements by analyzing pricing and trading data) claim, there is little to no significance to the Dow reaching 20,000 points in terms of which direction the market is likely to go today, tomorrow, one week, or even one month from today.
Since there really is not any significant meaning to the Dow Jones Industrial Average reaching the 20,000 point level, the historic benchmark is essentially just a nice story that sells advertising, newspapers, or some other form of media. Sure, some will speculate that the latest record high is another sign that the current bull market (which turns eight years old next month) is due to end soon. Speculating on the direction of the Dow or any other index is another form of gambling, like stock picking or market timing.
Disciplined investors understand that their well-diversified portfolios will provide them with the highest returns over time for the level of risk they are comfortable taking. These returns are not dependent on correctly timing the markets, or guessing the correct sectors of the market to invest in.
Whether the Dow Jones Industrial Average pushes through 21,000 points or 22,000 points in the coming weeks and months, or whether the Dow retreats from its highpoint to less rarified air: it doesn’t really matter for your financial plan. It is an entertaining story to follow and discuss with friends, family and colleagues. But the level of the Dow (or any other index) has no bearing on your financial plan. Let other “investors” speculate on the directional movements of the respective markets. Your financial plan and portfolio strategies were designed to help you achieve your financial goals regardless of the value of the Dow Jones Industrial Average today, or at any other time in the future.