Why the Dow 20,000 milestone shouldn’t change your plan
The Dow Jones Industrial Average hit 20,000 — the latest record high in a string of records since the November election. For most regular investors, though, this watched pot finally boiling means very little.
The Dow Jones Industrial Average hit 20,000 today, the latest record high in a string of record highs since the November presidential election.
The anticipation of hitting this milestone was palpable: Pundits vibrated on financial television, #Dow20K trended on Twitter more than once and Wall Street traders printed new hats. The rise from 19,000 on Nov. 22 makes it one of the fastest 1,000-point climbs in the Dow’s history.
Meanwhile, for regular investors — loosely defined as those who can’t find CNBC on their CableTV menus — the fact that this watched pot actually boiled means very little. Yes, your investments may be up, but one day soon, or perhaps not so soon, they’ll be down.
“Over the short term, benchmark milestones fuel emotions and can move the market. Over the long run, these milestones are meaningless,” says Neal Frankle, a financial planner and founder of Wealth Resources Group in Westlake Village, California.
Here’s why.
1 The Dow Is Just One Benchmark
And it’s a small one at that, representing just 30 stocks. The broader S&P 500 and Nasdaq have also been trading near record highs.
For the Dow, the quick drive to 20,000 was largely driven by the financial stocks in the index, specifically Goldman Sachs.
Bank stocks have been riding a wave since the election, spurred by two things: last month’s Federal Reserve rate hike — along with expected additional interest rate increases this year — and the anticipation that President Donald Trump will soften financial regulations.
But you have a diversified portfolio — don’t you? — and that means these Dow gains may not be your gains, at least not as much as you might expect. The Dow is a common measure of the U.S. stock market’s performance, but it’s certainly not the only benchmark by which you should judge your own investment returns.
2 The Market’s Moves Don’t Drive Your Plan
Or at least they shouldn’t if you want to maintain your sanity. Today’s landmark high means you can now Mad Lib this sentence: “________ happened and the Dow still hit 20,000.” Possible options for filling in that blank include the January 2016 market plunge, Brexit and the election of Trump — and those are just within the last year.
If you flipped the switch on your investments in response to any of those events, you learned this lesson the hard way. If your long-term goals haven’t changed, your investment strategy shouldn’t change, either.
“Don’t get caught up in the frenzy — in either direction — as a result of how close the market is to hitting a certain number,” says Frankle. “Revisit your long-term goals and your long-term investing approach. Once you are sure you are on the right path, don’t allow short-term political, economic or market news to disrupt you.”
3 The Tides Could Turn Quickly
When the Dow has hit milestones in the past — 100, 1,000, 10,000 — it has struggled to stay above those marks, sometimes taking years to actually maintain a level after first reaching it. Reaching the 20,000 mark today tells us little about what will happen tomorrow, let alone months or years from now.
But here are two things that can help drive your future: regular contributions to tax-advantaged retirement accounts like a 401(k) and a traditional or Roth IRA; and an emergency fund, so you don’t have to drain those accounts if you lose your job or total your car.
In other words, control what you can control, because while this milestone is exciting, it’s also meaningless — as long as you remember to treat it that way.
Arielle O’Shea is a staff writer at NerdWallet,a personal finance website. Email: aoshea@nerdwallet.com.
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Frequently Asked Questions
What does the Dow hitting 20,000 mean for regular investors?
For most regular investors, the Dow reaching 20,000 means very little in practical terms. Your investments may be up, but one day soon, or perhaps not so soon, they’ll be down. As financial planner Neal Frankle puts it, over the short term benchmark milestones fuel emotions and can move the market, but over the long run these milestones are meaningless.
Why is the Dow considered just one benchmark?
The Dow is a small benchmark, representing just 30 stocks. Its quick drive to 20,000 was largely driven by financial stocks in the index, specifically Goldman Sachs. The broader S&P 500 and Nasdaq have also been trading near record highs. The Dow is a common measure of U.S. stock market performance, but it’s not the only benchmark by which you should judge your own investment returns.
Should I change my investment strategy when the market hits a milestone?
Not if your long-term goals haven’t changed. If your goals are the same, your investment strategy shouldn’t change either. Frankle advises not getting caught up in the frenzy in either direction. Revisit your long-term goals and approach, and once you’re sure you’re on the right path, don’t allow short-term political, economic or market news to disrupt you.
Can the market reverse quickly after reaching a milestone?
Yes. When the Dow has hit milestones in the past, such as 100, 1,000 and 10,000, it has struggled to stay above those marks, sometimes taking years to maintain a level after first reaching it. Reaching the 20,000 mark tells us little about what will happen tomorrow, let alone months or years from now.
What can I control to drive my financial future?
Focus on what you can control. Two things that help are regular contributions to tax-advantaged retirement accounts like a 401(k) and a traditional or Roth IRA, and an emergency fund so you don’t have to drain those accounts if you lose your job or total your car. While the milestone is exciting, it’s also meaningless as long as you treat it that way.
