The Dow Jones Industrial Average closed at 20,068.51 which is an all time closing high. For those that like round numbers, this is a big deal. After all, Dow 20,000 seems like a much bigger number than 19,912 (which also happens to be yesterday’s closing price). To put this in perspective, today’s closing level on the Dow is less than 1% higher than yesterday’s close. So what does this mean for your investments?
The short answer is, nothing. Your risk is the same at Dow 20,000 as it is at 19k and 21k for that matter. No matter what level the stock indices reach, whether they be record highs or record lows, there will always be people with opposing views. Some will say the market is about to crash while others will say there is room to grow. A long term investment approach requires the ability to tune out the noise. In any market environment, there will always be risks and if you try, you could probably come up with a thousand reasons why now might be a bad time to invest. But, the same could be said when the Dow was at 17k, 13k, 10k, and 7k.
Let’s take a look at other big milestones for the Dow:
The Dow Jones Industrial Average first hit 1,000 in 1972. Shortly thereafter it lost 40% of its value. It wasn’t until November of 1980 that it crossed back over the 1,000 mark.
The Dow Jones Industrial Average first hit 10,000 in 1999. By September 2002, just three years later, it had dropped to 7,700. This was during the time of the dotcom bust, high profile accounting scandals, and the 9/11 terrorist attacks. It soon recovered and crossed back over the 10,000 level by December 2003. For the next four years it continued its climb and by September 30, 2007 after crossing 14,000 during the day, it closed at 13,930. Over the next few years, the US and world economy would experience a financial crisis not seen since The Great Depression. By February 2009, the Dow had dropped to 7,062. It didn’t cross back over the 10,000 mark until October of that year. After first crossing 10,000 in 1999, it crossed it again in 2003, and again in 2009!
What do the lessons of the past tell us about Dow 20,000? Unfortunately, they tell us very little. What we can learn from the past is that nothing is for certain. Crossing 20,000 doesn’t mean we’re off to the races and it doesn’t mean that disaster is right around the corner. What we do know is that markets are unpredictable. There will always be those who make predictions and if you make them often enough you’re bound to right. If you stick to the same prediction long enough, you’re bound to eventually be right too.
Rather than trying to predict the future, let your investment objective, risk tolerance, and time horizon be your guide. Identify what you are investing for. Understand how far into the future it will be before you need the funds. Be aware as to how comfortable (or uncomfortable) you would be weathering short term drops in the market. Build a diversified portfolio and don’t allocate all of your investments in stocks.
The Dow Jones Industrial Average crossing the 20,000 mark is a milestone but nothing more. The future is no brighter or darker than it was yesterday. Stick to your plan and don’t make changes when the market hits a milestone. Make changes when you hit milestones. Your personal financial situation is far more critical to your investment decisions that what is going on in the stock market.