Dow Nearing 30,000: The Implications

Blog post #429

The Dow Jones Industrial Average (DJIA) is close to the 30,000 mark for the first time in its history, as it exceeded the 29,000 level in mid-January.

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

It has taken only 3 years for the DJIA to increase from 20,000 to nearly 30,000, though there is no way to know when it will reach 30,000, as it is now trading below 29,000, as of Wednesday, January 29, 2020. Last week, prior to the reports of the Coronavirus outbreak in China and other parts of the world, the DJIA was above 29,300.

The DJIA first crossed 20,000 on January 25, 2017, a little over 3 years ago. While that is very fast for a 50% rise, from 20,000 to nearly 30,000, the increase was not straight up…there were a few significant, sharp periods of decline in the past three years.

However, it took almost 18 years for the DJIA to double from 10,000 to 20,000, which was a 100% increase. The 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.

While the DJIA and US stocks have risen dramatically since 2017, it is important to remember some of the key factors which cause stock market changes: changes in real earnings and future earnings expectations. Stocks have also been helped over the past decade by continued very low interest rates.

We encourage you to understand the perspective of the DJIA nearing 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.

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 or decrease of $1 in the share price of Apple, with a share price of around $325, impacts the DJIA approximately 2 ½ times more than a $1 increase in the price of Proctor & Gamble, which is priced around $126. Thus, stocks with higher share prices affect the DJIA more than the price changes of lower priced stocks, such as GE today.

As the DJIA gets to even higher levels, we want to encourage you to put DJIA “number headlines” in the proper perspective. If the Dow is at 30,000, a 100 point increase or decrease is only a 0.33% change. A 250 point change would be less than 1%, at 0.83%. So even a 250 point increase or decrease is really not that significant.

  • When the Dow was at 10,000, a 250 point daily change was over a 2.5% change.
Please keep actual DJIA point moves in the proper perspective. It is better to think of the changes in percentage terms, which are more relevant.

What do these levels mean to you? With various US major stock indices reaching new highs in January 2020, we want to remind you that we focus on long term global portfolios and your personal investment plan. We recommend a globally diversified portfolio, which includes both US and non-US stocks, with a tilt towards small and value stocks.

We regularly monitor your exposure to stocks and we will rebalance (sell or buy stocks) if your stock allocation increases (or decreases) significantly from your agreed upon stock allocation.

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 stock market increases, 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 for your risk tolerance or to meet your financial goals. 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 long-term approach to investment management.

Stock market indices nearing new highs gives us confidence in our long term approach to investing, by maintaining consistent and appropriate allocation to stocks.

Talk with us. If you know of family or friends who could benefit from this type of advice and guidance, please share this post with them, and let them know we are available to help them as well.

 

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