Dow 20,000: The Implications

The Dow Jones Industrial Average (DJIA) crossed over and closed above the 20,000 mark for the first time in its history on Wednesday, January 25, 2017.

This is historic because it represents the continued increase in the worth of large, US companies and their respective stocks.

The DJIA has increased about 10% since the start of November (the election), while the broader S&P 500 has gained 7%. The DJIA’s first close above 19,000 was on November 22, 2016.

While the DJIA and US stocks have risen dramatically since the election, it is important to remember what causes stock market changes: real earnings and future earnings expectations. 

U.S. stocks increased after the election due to expectations of better future business conditions.

This week, we think the market increases are based more on actual earnings and company results. As companies have released their 4th quarter, 2016 earnings this week, they have reported solid results and positive future guidance about their earnings.

For example, despite whatever Washington has said or done this week regarding business or taxes, if most of the companies’ earnings reports this week had been below expectations or indicated future weakness in earnings guidance, the DJIA and other broader stock market indices would have gone down, not up.

What does this new high mean to you? With all the US major stock indices reaching new highs this week, we want to emphasize that we focus on long term global portfolios and your personal investment plan. We monitor your exposure to stocks and we will rebalance (sell or buy stocks) if your stock allocation increases (or decreases) significantly from our agreed upon stock allocation.

We recommend a globally diversified portfolio, which includes both US and non-US stocks, with an emphasis on small and value stocks.

In real terms, if you have a $3 million portfolio with a 60% stock allocation, your stock holdings target would be $1.8 million. If because of a stock market increase, your total portfolio grew to $3.4 million with $2.2 million in stocks, your stock allocation would now be 65%, which is more risk than we agreed was necessary. We would review and likely sell about $160,000 of stocks, to bring the stock allocation back to 60% (based on tax and other considerations). This is how we are disciplined and rational in our approach to investment management.

We encourage you to understand the perspective of the DJIA reaching this milestone. The DJIA is composed of only 30 stocks. The DJIA at times may perform similarly to the S&P 500, an index of 500 US based large companies, but these two major indices may perform differently for many reasons.

While the DJIA and S&P 500 performances are similar over the past 20 years, the S&P 500 has outperformed the DJIA by more than 30% since the 2008 market crash. Non-US market indices generally perform differently than US indices. International indices trailed US markets in 2016, but most International indices are outperforming the US so far in January 2017.

The DJIA gets a lot of media attention, so it is important for that reason.  However, the DJIA is calculated in an old-fashioned manner which is not considered an accurate representation of how investors are really doing.

The DJIA is calculated based on share price, not based on a stock’s market capitalization.  This means that an increase of $1 in the share price of Goldman Sachs, with a share price of around $236, is worth twice as much as a $1 increase in the price of Apple, even though Apple has a market capitalization which is 6X greater than Goldman Sachs.  Similarly, a price change in Goldman is worth 8X more than the price change of Cisco, which trades around $30 per share.

DJIA first closed over 10,000 in March 1999. It went back and forth 33 times above and below that 10,000 level until August 27, 2010, the last time it was around 10,000. This emphasizes the patience which is needed to reap the rewards of investing in stocks.

As the DJIA gets to even higher levels, we want to encourage you to put DJIA “headlines” in the proper perspective. With the Dow at 20,000, a 100 point increase or decrease is only a ½% move. A 250 point change is 1.25%. That is really not that significant. When the Dow was at 7,500, a 250 point daily change was over a 3% move. Please keep actual DJIA point moves in the proper perspective.

Stock market indices reaching new highs confirm our long term approach to investing, by maintaining consistent and appropriate allocation to stocks.

Sources: various Wall Street Journal articles, 1/26/27 (online).


Asset Allocation under a Trump Administration

With major changes in Washington, you may be wondering things like the following:

  • Where is the market going?
  • Is it the right time to invest more or should I get out of the market?
  • Should I make any major changes to my asset allocation or investment portfolio?

We all desire certainty, but we live in an uncertain world.

Based on who is President, we would not recommend changes to your investment strategy or plan. We didn’t recommend major portfolio changes when President Obama was elected and we are not recommending specific changes now.

President Obama was first inaugurated on January 20, 2009. The S & P 500 has been positive every year of his 8 years as President, from 2009-2016. Did you realize that?

While some were concerned about the country’s future when Obama was elected and some of his policy views, investors who remained patient have been very well rewarded. Others may now be concerned about the upcoming change in administrations. We want to stress the importance of trying to leave your political emotions aside from your investment actions.

Stock markets are efficient. Another way of saying this is that the market knows more than any one individual, firm or money manager. This means that professional money mangers cannot consistently outguess and beat the stock market, which is supported by years of industry performance data.

This is good news for you. It means we, and you, can focus on what you can control. It means you can capture good long-term returns without having to spend time and energy trying to forecast, predict or worry about the market or the future of specific stocks.

One of the most important things you can control is your allocation to stocks. This is the amount of risk you want to take, such as having a 40% allocation to stocks, versus having 70% of your portfolio invested in stocks.

We work with clients to determine an appropriate asset allocation between stocks and fixed income (such as bonds, CDs and cash) based on your personal needs, not necessarily on your view of the world or current events. Factors such as your age, need for future growth or your withdrawal needs, time frame and your goals impact this decision.

It is more important for you to establish proper expectations and an allocation you are truly comfortable with, which requires you to accept the volatility of investing in an uncertain world.

If you are in retirement and in the withdrawal stage of your life, we work with you to determine an optimal, appropriate allocation based on your withdrawal needs. We would review with you your assets, sources of income (Social Security, pension, etc.) and cash flow needs. We would discuss your need and comfort to take risk. These factors, and not who is President, drives our investment focus.

By managing your risk through your stock allocation and our belief in broad, global diversification, we can help you to handle the uncertainty which exists in investing.

Your confidence is important. As we adhere to a consistent and successful investment philosophy and we provide you with transparency about your investments, these should increase your confidence that our strategy will deliver upon its objectives.

We recommend a globally diversified portfolio, with an emphasis on small stocks over large stocks and value stocks over large company stocks. While this strategy has done particularly well since Trump was elected, this is not a new strategy for our firm and its clients. We have adhered to this strategy and our overall investment philosophy since our firm was started.

Unless there is convincing academic evidence to the contrary, we plan to continue our investment philosophy, as it works. We recommend that you base your asset allocation on your personal situation, not on who is President.

Actionable Information

With the S&P 500 and other US stock market indices hitting new all-time highs and the Dow Jones Industrial Average (DJIA), an index of 30 US based stocks, nearing the 20,000 level for the first time, should this cause a change in your investment strategy?

History tells us that a market index being at an all-time high generally does provide actionable information for investors. History and US stock market data would recommend that as a long-term investor, you maintain your appropriate stock market allocation, even though markets may be at highs.

As financial advisors, we recommend a globally diversified portfolio of both US and International stock funds be held. For purposes of this essay, information on US stock markets is used, but the same logic can be applied to International stocks.

For evidence, let’s look at the S&P 500 Index for the last 90 years. As shown in Exhibit 1, from 1926 through the end of 2016:

  • Over the 1,081 months during the period, 319 months, or 29% had new closing highs.
  • After a new monthly high, there were positive returns 80.5% of the time over the next 12 months.
  • For all 1,081 months, there were positive returns 74.7% of the time over the next 12 month period.S&P 500 Total Return Index Highs 1926-2016 chart


While this data does not help us predict future returns, especially in the short-term, it validates the importance of remaining invested over the long-term. It shows that the S&P 500 has been higher 12 months later around 75% of the time over the past 90 years. Staying invested and not making changes based on your emotions and current news events increases your likelihood of long-term investing success.

Many studies document that professional money managers have been unable to deliver consistent outperformance by outguessing market prices. In the end, prices set by market forces are difficult to outguess. This is why we have adopted, and consistently adhere, to our investment strategy of using index-like mutual funds.

It is reasonable to assume that the price of a stock, or the price of a basket of stocks like the S&P 500 Index, should be set so their expected return is positive, regardless of whether or not that price level is at a new high. This helps explain why new index highs have not, on average, been followed by negative returns. At a new high, a new low, or something in between, expected future returns are positive.

So while expected future returns are positive, that does not help us know the future direction of stocks, especially in the short term. Historically, however, the probability of equity returns being positive increases over longer time periods compared to shorter periods. Exhibit 2 shows the percentage of time that the equity market premium (defined for this purpose as the Total US Stock market, over the short term US Treasury bill return) was positive over different rolling time periods going back to 1928.

Historical Performance of Equity Market Premium over Rolling Periods


When the length of the time period measured increases, so does the chance of the stock market premium being positive. As an investor’s holding period increases, the probability of a negative realized return decreases. This is why it is important to choose a level of equity exposure that you can stay invested in over the long term.

We can certainly not predict how the stock market will do in the next few months or even the next few years. We know it is normal for there to be ups, as well as regular declines of 10% or more within a year, even if a year turns out to be positive (like 2016). However, we remain rationally positive that over the long-term, you will benefit if you remain invested in a diversified portfolio which is appropriate for your personal situation.
Source: Dimensional Fund Advisors LP


Disclosure A: The S&P data is provided by Standard & Poor’s Index Services Group.  For illustrative purposes only.  Index is not available for direct investment.  Past performance is no guarantee of future results.


Disclosure B:  Information provided by Dimensional Fund Advisors LP.  Based on rolling annualized returns using monthly data.  Rolling multiyear periods overlap and are not independent.  This statistical dependence must be considered when assessing the reliability of long-horizon return differences.  Fama/French indices provided by Ken French.  Index descriptions available upon request.  Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.  Indices are not available for direct investment.  Past performance is not a guarantee of future results.



My 2017 New Year’s Resolution

You are reading my New Year’s Resolution, which is to continue writing these blog posts / essays every week.

I have been writing these blog posts on a weekly basis since June, 2014. I wrote 51 of them in 2016.

Writing these essays is important for many reasons.

Writing regularly makes us better advisors. Knowing that I am writing an essay every week makes me more aware and focused on what is going on in the financial world, so that I can communicate about relevant topics to you and provide better advice.

My intention is that through these essays, our investment philosophy is reinforced and explained to you, especially as real world events occur. We can explain how current events and financial market changes impact you and our decision making.

These essays should educate and inform you. Reading them regularly should make you a better long-term investor. My hope is that through my writing and your reading of these essays, you will be better prepared to handle the financial markets when they are challenging.

These essays are also becoming a historical real-time record of our thoughts and advice. You can read all of our past blog posts on our website,

  • Do you remember that the world’s stock markets dropped suddenly to begin 2016? We wrote about that here, on January 7, 2016.
  • On October 10, 2014, with the S&P 500 almost 20% lower than it is today, and after a large decline, we wrote “Our Investment Outlook.”

It is pretty clear that 2017 will be a year of significant tax changes. Through these weekly blog posts, we will keep you informed in a timely manner about changes which may be relevant to you, as ideas become real legislation.

We think these essays differentiate our firm from many other financial advisory firms. This is not a generic newsletter written by a research analyst in New York whom you have never met. I personally write these essays so they are relevant to our clients and the issues you face and think about.

Writing these essays takes time and effort and discipline. We know it is worthwhile. We hope you agree.


Thanks for reading!