Dow Jones 20,000, It’s Just a Number
Well, it’s a good number, but still just a number. The press, and many people get a little too hung up when the stock market hits a big round number, and 20,000 is the biggest round number we have seen to date. There will be a number of articles and commentary that appear strongly suggesting that this historical bull market has a long way to go for any number of very plausible reasons. There will be an equal number of articles and commentary predicting that this market is overpriced, will soon take a big hit and bring the financial world as we know it to an end (yet again) taking our net worth with it. I think it might be a good time for a little financial perspective, and maybe a reminder or two of what we believe and how we manage your money.
Make Money, Become More Valuable
The S&P 500 is a proxy for the U.S. stock market, and a better one than the Dow Jones Industrial Average (only 30 companies). Over the last 100 years (through 12/31/16) it has gone from a value of 9.33 to 2246.63. That is a compounded return with dividends re-invested of 9.98% per year. For the last 50 years it has gone from 93.32 to 2246.63 with a 9.65% per year. And for the last twenty five years it has gone from 325.49 to 2246.63 with a return of 9.65% per year. Whoa! There is only one reason for these remarkably consistent performance numbers. The 500 biggest companies in America, in aggregate, have consistently grown their profits and earnings over time … and their value has increased accordingly. Getting back to the more popular Dow Jones, don’t be surprised if in twenty five years it hits 172,000! All I did was compound 20,000 by 9% for 25 years.
Short Term = Low Probability of Success
It is very difficult to predict short term market movements, because they are caused by people and institutions, and have nothing to do with what the underlying companies will do in the next 25 years. Honestly, what were you thinking would happen before our current president was elected versus what has actually happened? I rest my case that short term, market movements are random and unpredictable. Right now, the current short term wisdom says America will be in great shape for the next few years with our new found nationalism leanings, and the rest of the world not so good. Stay tuned for details.
It Is Never Different This Time
There has been a great deal of financial angst associated with the election of our new president. I have talked with a number of clients who are not comfortable with the investments with Mr. Trump as president. Presidents historically haven’t had much of an effect on long term stock market performance. I am hearing from those clients words to the effect that “It’s different this time, and I want to get more defensive with my portfolio. Well, financial history suggests that it’s never different. We have had a variety of financial challenges over time, but the process is always the same. We have a problem, we deal with it and move on.
Diversification Is a Wonderful Thing
Portfolio Diversification is your biggest protection against whatever financial markets are doing at any given time. You have a very diversified portfolio. If one or two pieces of your “portfolio pie” take a hit, it doesn’t have much of an effect on performance. On the other hand, if one or two pieces are going gangbusters, it also doesn’t have much of an effect. November of 2016 was the worst month for bonds ever. The U.S. bond market went down 3.5%. We had a handful of clients with significant bond positions call after they saw their November financial statements. They wanted to know why their accounts didn’t go up more, with the U.S. stock market having great month of November. Thank you diversification.
Don’t Sell Low or Buy High
Just a bit more on your diversified portfolio. Please resist the temptation to sell those poorly performing pie pieces. American investors in general have an outstanding track record of selling things after they went down and before the go up again. Also, please resist the temptation to add money to those pie pieces that are doing terrific. Americans in general are also very good at adding money to investments after they went way up and just before they go down. We will do our best to guide you so you don’t fall into this trap.
Time, Not Timing
Lastly, successful investors are long term investors. Up until yesterday, all of the world’s stock markets have gone up over the long term (yes with some very exciting interruptions). The big trend is up over the long term. Ride the big trend. How long does it take to grow a company? One of my favorite sayings is “Your investment time frame is the rest of your life.” Invest accordingly, and be patient.
Live long! Be happy! Be healthy! Call if you want to talk.
Certified Financial Planner