Dow 40,000

The DJIA (Dow Jones Industrial Average, or “Dow”) is nearing 20,000. It currently trades around 19,570, which is an all-time record high.

Will it go higher? Will it reach new highs? Absolutely yes!

How about Dow 40,000? Yes, that will occur. And we would not be surprised if that occurs within the next 10-15 years. (See below for our analysis).

For a firm which does not make predictions, this may seem like quite a bold statement.

We are not really making a forecast or bet, but providing an example of our confidence in the future, the continued ability of companies to grow their earnings over the long term, as well as relying on historical economic data and the power of compounding.

In 2012, with the Dow at 13,000, Seth Masters, the chief investment officer of a Wall Street firm, “boldly predicted” that the Dow would reach 20,000 by 2022. When the Dow reaches 20,000, you will likely read lots of stories about his prediction.

However, on closer examination, Master’s prediction was not really that bold. It may have taken some guts, but he was just being positive and logical. The Dow needed to grow by just 4.75% per year, which is below the historical annual return rate of US stocks, for the Dow to grow from 13,000 to 20,000 over the 10 year time period. So, it was actually conservative for him to predict that the Dow would reach 20,000 by 2022.

The Dow is composed of just 30 stocks, which are all US large companies. The companies that make up the Dow change over time, as companies and the economy evolve. GE is the only company of the original 12 DJIA stocks.

So back to our prediction of Dow 40,000.

* If stocks in the Dow grow at 5% on average per year, the Dow would reach 40,000 in 15 years, around the end of 2030.
* If the Dow grows at 7% on average per year, the Dow would reach 40,000 in around 11 years, in 2026.

Those are actually very realistic forecasts, as the annual historical return of large US company stocks is around 8%. We can guarantee that the future direction of stocks will not be straight up. There will be months or years of huge, temporary market declines which may challenge you to continue to stick with your stock allocation. Helping you during these periods is another value we will provide to you.

As the 30 Dow component companies are very large US stocks, it is reasonable to assume their future growth and stock performance may be less than smaller companies. We believe it is in your best interest to own a globally diversified stock portfolio, with the stock allocation of your total portfolio based on your individual circumstances and needs. We recommend holding a significant portion of your stock allocation in stocks which are not included in the Dow, such as US small value companies, foreign stocks and many other stocks which are not in the DJIA, as discussed in last week’s blog post, click here. Thus, broader indexes of stocks, such as the S&P 500, small cap and International stock indexes are much more important than the growth of the DJIA.

As the future certainly cannot be forecasted, the success or failure of the 30 stocks within the Dow cannot be predicted. Also, no one can predict or know which stocks will be added or deleted to the Dow over time.

Thus, we think it is more relevant to look at the future growth possibilities of broader indexes, such as the S&P 500.

* The S&P 500 currently is around 2,240.
* If the S&P 500 grows at 5% on average per year, the S&P 500 would reach 4,650 in 15 years, around the end of 2030.
* If the S&P 500 grows at 7% on average per year, the S&P 500 would reach 4,700 in around 11 years, in 2026.

These figures don’t seem as exciting as Dow 20,000 or Dow 40,000, but the future of broader stock indexes, both in the US and globally, are more relevant to your financial future than just the 30 stocks which make up the DJIA. We could provide forecasts for small company stock indexes or International indexes, but the same concepts apply to those; they will go up and down at various times, with a long-term positive trend.

Be positive.

Be patient.

And it will be interesting to review this essay with you in the future!

Note: Sources available upon request.

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