DOW 20K: More Psychological Than Material

by | Jan 25, 2017

When it comes to money, a certain hype exists around hitting psychological thresholds.

Think about the first time your bank account reached $1,000, and it wasn’t already “spent.” I remember feeling a sense of accomplishment: I had finally arrived. Or consider your salary expectations. My college buddies and I used to joke that we’d surely be making six figures by age 30. But in reality, is $900 in the bank much different than $1,000? Is making $90,000 that different from $100,000?

And in the stock market, is 20,000 in the DOW1 really so different than 19,000?

As an investor, it’s important to understand that the “DOW 20K” mark is really just a psychological benchmark, similar to the bank account or salary examples.

The number itself doesn’t suggest anything concrete about what the future may hold, especially considering that the DOW isn’t representative of the business landscape or overall U.S. stock market. The DOW’s weighting methodology can also make milestones appear more significant than they are. In reality, each 1,000-point benchmark actually becomes less meaningful as the DOW increases. For example, the move from 2,000 to 10,000 required a 400% return—but the move from 10,000 to 20,000 required only a 100% return.

It can be difficult to tune out media hype. However, eschewing it for a long-term investment approach (and, in this case, a realistic perspective of indices) will ultimately benefit you as an investor. Rather than making emotional-or media-driven investment decisions, focus on the things you can control: asset allocation, risk exposure, investment costs and taxes.

1“DOW” refers to the DOW Jones Industrial Average, a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

Kyle earned his BA and MBA in Finance from the University of Memphis. He spent his time in Memphis, working as a financial planner, before relocating to St. Louis in 2009 to join Plancorp. More>>