So Dow 20,000 happened. Many people will take credit for it, undeservedly so. Sure it’s a cool milestone and the psychology around it is important but the number is arbitrary. It’s no more important than when the Dow hit 5,000 or 10,000.
Still, Dow 20,000 will be splashed all across the news this week, which will get people interested. Combine that with the fact that people have never felt better financially and perspectives may change.
Optimism is okay…until it spreads into other areas. When people feel financially better, they’re willing to spend more, they treat debt differently, they see they’re investments differently, maybe they like stocks more (Dow 20,000 certainly helps), and they might be willing to take more risks.
Or redefine risk.
Risk means different things to different investors depending on where the market is at in its cycle. After 2008, risk meant losing more money. More specifically, risk was owning stocks. Today, risk might just mean missing out on a market move higher or simply underperforming the neighbors. Keeping up with the Joneses rears its ugly head in investing too. And when the Joneses only brag about what’s gone right, it’s easy to think you’re falling behind. In other words, risk might mean not owning stocks.
Of course, arbitrary milestones are a poor reason to upend your portfolio. But it’s a milestone nonetheless that acts as a reminder to investors how high the market has moved since the lowly days of Dow 6626 in March 2009, what they might have gained, and that it’s something they believe will continue.
Optimism is infectious. As stocks rise, investors like stocks more, and they’re willing to pay more to own them. Then it snowballs as more investors do the same. And history is full of examples of how that ends.
The mental games around investing get exhausting.
In a rational world, only investors selling stocks should want higher prices. And stock buyers should want lower prices, not higher ones. And Dow 20,000 is a 30-stock benchmark being praised for higher prices. So only sellers should be rejoicing. Everyone else should be cautiously waiting for lower prices.
But this is not a rational world. People do all of the above and more.
The only lesson around Dow 20,000 is this: It takes time for money to double and double again and again. Compounding works on indexes just as well as it does on money (the advantage investors have over the index is the inclusion of dividends). The people who should be excited about Dow 20,000 are those who invested decades ago in as little as 30 stocks (maybe to track an index), stuck with it despite all the obstacles history threw at them, and came out unscathed and richer for it.
- Putting Dow 20,000 Into Context – AAII
- Influence, Temptation, And Persuasion – Irrelevant Investor
- Don’t Let Other Investors Make Up Your Mind – J. Zweig
- Why Warren Buffett Keeps Reminders of Awful Moments in Economic History – Time
- Larry Fink’s Annual Letter to CEOs – Blackrock
- You Can See Where This is Going (pdf) – Collaborative Fund
- NAFTA and Other Trade Deals Have Not Gutted American Manufacturing – B. DeLong
- How to Make America’s Robots Great Again – NY Times
- Why It Matters That Human Poker Pros Are Getting Trounced By an AI – Gizmodo
- MiB Podcast: Charles Ellis’ Advice for Individual Investors – Bloomberg