Dow 20,000, Down From Here?

February 9, 2017

The Dow did it.  It hit 20,000.  This is a monumental moment in market history that has made headlines the last couple of weeks.  Anytime such a height is reached, it makes you worry about the other side.  You may say to yourself something along the lines of “Time for the market to drop.”

Whenever all-time highs happen, they get publicized.  That’s for good reason.  It’s exciting.  It means you’ve made money.  It means something just happened that has never happened before.  Or has it?  Well in reality, if you hit an all-time high today, there’s a darn good chance you will hit another one tomorrow.  On a daily basis, the market is up about half the time and down the other half.  So it turns out hitting an all-time high tomorrow after you just hit one today is a coin flip.  In fact, if we look at this further, in 2016 alone, we hit 26 “all-time highs!”  So even though “Dow 20,000” is well publicized news, it isn’t necessarily meaningful news.

If we didn’t expect the market, over time, to continually hit all-time highs, it would not be a good place to be invested at all.  The only way to make money in that type of market is to be a market timer or short the market consistently, two strategies that have proven folly over the course of time.

We often think back over the history of BDF which dates back to 1986.  At the time, the Dow was a little bit under 2,000, and now it is at 20,000 – an amazing ascent.  However, in percentage terms it’s more than reasonable.  In fact, that growth rate over the 30+ years turns into about an 8.1% per year return for the Dow.  If we experienced 8.1% per year growth for the Dow over the next 30 years, it puts the Dow over 200,000!

Off the cuff, that sounds ridiculous.  That’s because our minds are susceptible to what is called anchoring bias.  Essentially, this means once a frame of reference is in our head, like a number, it becomes a subject of decision making due to its familiarity.  An example is when the Dow moves triple digits in a day (100+ point movements).  In the grand scheme of things, a 100 point move on a 20,000 Dow is only 0.5%, or basically expected daily volatility.  Yet we still talk about triple digit days.  Back when the Dow was at 2,000, down 100 points hurt a lot since that meant you lost 5% in a day.  Here anchoring has still not gone away.

There are always plenty of reasons out there that the market could fall.  However, one of them simply is not because it is at an all-time high.  Over time, the future is bright to reach new heights again and again.  You don’t get that without risk and some pain, as shown in the roller coaster below, but eventually you do get to where you need to be.


Source: Yahoo!Finance. Data from 9/2/1986 through 1/27/2017 on the Dow Jones Industrial Average 

The Dow Jones Industrial Average (Dow) is a price-weighted average of 30 actively traded blue-chip U.S. stocks.

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