We all saw the headlines! “The Dow reaches 20,000!” But what significance does this have is to the average investor? Studies show, not much. For the media it means headlines and talking points. For traders and speculators, it may be an excuse to make some trade based on expected short-term outcomes. I believe that for investors, it means nothing except for its potential to distract you from what really matters.
It’s nice that stock market indices are increasing, but what does it really matter that the Dow hit 20,000? Sure, it’s a nice round number with lots of zeros. But there is really no difference between the Dow hitting 20,000; 20,126; or even 19,944.
Your financial goals are unaffected by an arbitrary index hitting some round number, even if that number is “psychologically important”. Your financial goals are affected to a much greater degree by the investment choices you make, and your willingness to stay disciplined with your investment and financial planning strategy.
Does Dow 20,000 influence you to predict where the market is heading? Afterall, that’s what the experts are doing right now. Perhaps you are thinking “Wow, that is expensive, maybe I should lighten up on stocks and wait until the market dips down a bit.” Or maybe you are thinking, “This has real momentum. Let’s back up the truck and buy more US stocks!”
Both may be prudent options, but either way, your investment decisions should not be made based on some arbitrary index figure. If there is anything we have learned throughout the history of the market, it is that the market goes a lot lower than we expect during bad times, and a lot higher than we expect during good times. And decades of market history have shown that the most consistent and costly investor errors come from speculating on the market’s direction.
That is the why I encourage my clients to remain focused on their financial plans. Your plan is customized to reflect your needs and values. It isn’t influenced by the headlines of the day nor the whims of the market. It is the constant in an otherwise unpredictable and volatile market.
Disclosure
The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and non-utility) goods and services. The Dow Jones industrial averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore, their component weightings are affected only by changes in the stocks’ prices. It is not possible to invest directly in an index.
Basic content material compiled by Jay Mooreland from the Emotional Investor; but edited by Kerri Patrick for my audience and blog.