3 Helpful Rules for Investors as the Dow Goes Up
The Dow is climbing, and with it, investors' hopes and dreams. The Dow Jones industrial average shot past the 25,000 mark for the first time in January -- and just a week later, topped a new milestone of 26,000.
Happy? You're right to be. But assuming the Dow continues its path ever upward and your stock portfolio gets even bigger, you're going to want to remember some things to help you continue to invest wisely. Because while you may think you know everything you need to know about the stock market (and maybe you do!), this is not your parents' or grandparents' Dow.
The Dow is changing, and so are some of the "rules" that go along with it.
A gain or loss of 1,000 points isn't as dramatic as it used to be. In early January, some media outlets were quick to point out that the Dow going from 24,000 to 25,000 was the shortest stretch between 1,000-point milestones ever -- just 23 days. That mark shrunk to seven days when the Dow rose from 25,000 to 26,000.
These milestones sound exciting, but it's not a big deal as you might think.
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"Due to the power of compound interest, a 1,000-point swing in the Dow does not amount to much today as it did in the past. A thousand-point swing in 1987 was a 25 percent move, while today it would be only 4 percent," says Jon Ulin, a certified financial planner and the managing principal of Ulin & Co. Wealth Management, a branch of LPL Financial in Boca Raton, Florida.
For some historical perspective, the Dow first hit 10,000 in March 1999, which was considered rather mind-blowing back then, and just a couple of months later it reached 11,000. That was a 10 percent gain.
But moving from 24,000 to 25,000 represents only a 4.16 increase. And if the Dow ever goes from 29,000 to 30,000, that 1,000-point gain would represent only a 3.4 percent gain.
It's reasonable to be enthusiastic about the Dow climbing 1,000 points, but the higher it goes, the less impressive a marker it becomes.
When the Dow goes back down, it may look worse than it is. The stock market always goes down eventually. There's no reason to think that eventually it won't revisit its youthful carefree days when it was below 25,000.
In fact, you can almost count on it.
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"Volatility seems to be a new normal in the market over the last 15 years, having experienced four 1,000-plus-point declines, three 900-plus-point gains and 20 swings of plus or minus 650 points," says Dave Alison, a certified finanical planner at Prosperity Capital Advisors in Westlake, Ohio. "Now that the Dow has climbed to over 25,000, these swings can seem even more intense."
When the Dow dropped 1,100 points on Aug. 24, 2015, the market was at about 16,400, representing a drop of about 7 percent. Today, a 7 percent drop in market value would be a swing of more than 1,800 points.
And even if the Dow were to drop by 7 percent tomorrow -- and yes, it would be significant and unpleasant -- such a drop doesn't mean that the stock market is imploding. For comparison's sake, during the Great Recession the Dow dropped steadily, going from 14,164.43 on Oct. 9, 2007, to 6,594.44, on March 5, 2009, a fall of more than 50 percent.
For something similar to happen now, "in today's numbers, the Dow Jones would fall 12,500 points," says Doug Amis, a certified financial planner and president of Cardinal Retirement Planning, Inc in Cary, North Carolina.
What goes up may come down. It's exciting to see the Dow climb. Shortly after it hit 25,000, President Donald Trump said to reporters, "I guess our new number is 30,000." Certainly, if the Dow continues to advance and there's a lot of buzz in the media and investment circles, it may be tempting to invest more money than you typically would.
But the general rules that have always held true will continue to be true -- don't risk money that you can't afford to lose, and remember that any short-term losses in a diversified portfolio will eventually be regained in the long run.
"The markets giveth and taketh away," says Scott Laue, a financial advisor with Savant Capital Management, headquartered in Rockford, Illinois. "But seven-and-a-half years out of 10, on average, the markets are up. Those are good odds for long-term money."
He also points out that too many investors forget that they're supposed to be in this for the long term.
"Our experience is that the pain of a loss far outweighs the joy of a gain, so we don't hear from our clients when the Dow goes up 1,000 points. But I suspect our phone would ring if we had a pullback of that same 1,000 points," he says.
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Alison has similar advice. "Establish a solid long-term investment strategy and stay accountable and committed to maintaining it," he says. "Don't get caught up in the hype of trying to time the market, and in 15 or 20 years you'll look back and be glad you spent that time with family and friends -- instead of sitting at a computer screen adding stress and anxiety to your life by trying to get in, get out, and get back in again."
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