Dow 20,000: Does It Matter?

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Jan 09, 2017
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Article, Behavioral Finance, Question of the Day, Investing, Stocks, Current Events

Investing commentators are breathless as the Dow Jones Industrial Average closes in on the 20,000 mark. Here’s a smattering of the recent clickbait, I mean, headlines (12.5 million results on Google!):

The Dow closed at 19,963.80 on Friday, January 6th. Ok, let’s just say there is a very high likelihood it crosses that magical 20,000 mark this week. I don’t think I am going out on a limb in predicting that (and you know how much I hate prognosticators!). So, back to the original question, does it matter? Quick refresher. Remember that the Dow Jones Industrial Average is made up of 30 large cap U.S. based companies (Apple, Coca-Cola and Disney are among the constituents). It is a price-weighted index which means stocks with higher stock prices have a larger impact on the index than lower-priced stocks. Listen to this 17 minute Planet Money podcast to hear them rant on why the Dow Jones Industrial Average should be ignored (frankly the S&P500 is a much better representative index than the DJ30)

So, what do I think? From an analytical standpoint, there is nothing magical about the index hitting this level except that it is a big round number (and somewhere there is an author of a book called Dow 20,000 who will magically appear on all the major financial networks when this milestone occurs). I would answer that it doesn’t matter, except it could impact investor psychology. How? It will generates lots of meaningless headlines and news stories and may get those “animal spirits” going on Wall Street and Main Street as the public wakes up to an rising stock market. Let’s see what happens. In the meantime…some math:

I thought it would be fun to see when the Dow first 5,000 point increment milestones previously:

  • Dow 20,000: You heard it here first, sometime in 2017:)
  • Dow 15,000: May 3, 2013
  • Dow 10,000:  March 30, 1999
  • Dow 5,000: November 21, 1995

Questions:

  • Based on these milestones, what would have been the best period to invest in the Dow Jones? The worst period?
  • As an investor, which 5,000 point increase would have been most valuable to you? The rise from 5,000 to 10,000 or 15,000 to 20,000? Why?
  • Assuming Dow hits 20,000 in 2017, how many years would it have taken to double? Based on the rule of 72, what was the annual rate of return over that period? Was that return above or below historical returns?
  • About how many years did it take the Dow to double from 5,000 to 10,000? Based on the rule of 72, what was the annual rate of return over that period? Was that return above or below historical returns?

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Check out the NGPF Fine Print on How to Read A Mutual Fund Fact Sheet.

 

 

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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