22 December, 2016

The Dow at 20,000 Points!! Pop the Champagne and Hug Your Advisor! Not so Fast!

Today, many are celebrating the fact that the Dow Jones has almost reached 20,000 points, an all-time high. Before your wash down that caviar with a glass of Moet Chandon, there is a thing or two you should know.

Many feel that the current rise of the stock markets is riddled with euphoria, and while that is correct, the question we should be asking ourselves, is it reasonable based on the history of stock market returns?

In fact, we as investors should be lamenting the fact that the stock market should have reached 20,000 points long ago. Before, you call 911, and have me committed, let me explain.

First, milestones are not an “if” but a “when”. The Dow will hit 100,000 points in the future and you can take that to the bank. No, sorry, not the bank, but to your wealth advisor. Here’s my point. If the stock market had risen this century, at the same rate as the last century, the Dow would be at 24,000 points today, not 20,000, so, it has underperformed historically. Wow, how’s that for a lesson in wealth creation.

So, when will the Dow reach 100,000 points? Note that I said “when” not “if”. According to Hulbert’s ratings, the Dow will hit 100,000 points in 2044 assuming an average annualized rate of return of 6%, well under the historical average rate of return of close to 10% per year. If by chance, the Dow does continue its average rate of return of 10% it will hit 100,000 points in 2033. On the other hand, if we took an average annualized rate of return of just over7%, the Dow would reach 100,000 points in 2037, which, to me, the one I would bet on. That’s only 20 years from now!

The take away from this, is that, long-term equity investors will reap significant financial rewards, if they stay the course.  And it does not take a high IQ or smarts to garner meaningful wealth. All it takes is a dividend strategy; investing in companies with a long history of dividend growth (Coke anyone) and, a great advisor who will tip toe you through the times when the media is trying to scare the living beejezzus out of you.  Oh, one more thing, stop listening to the baloney on the financial news networks. Happy New Year!