Dow hits a new high

Sam Swift, CFA, CFP®, AIF®

Mar 7, 2013

The Dow Jones Industrial Average hit a new all-time high this week and I think the only reason it’s relevant is to give people something to write about (guilty as charged). It took me three minutes of googling to find articles as to why this rally will continue forever here, here, and here and three more minutes of googling to find articles as to why the rally can’t last here, here, and here. So let’s take a step back from speculating—in fact, let’s take a lot of steps back from speculating and try not to talk about it ever again—and discuss what the new high means which is, of course, not much.

First, the Dow Jones Industrial Average is composed of 30 U.S. Large Company stocks—hardly a representative sample of a well-diversified portfolio. In portfolio’s I generally put together, for example, those 30 stocks may make up a few percent of an entire equity allocation across the globe. And actually, the Dow as currently constructed only has 25 of the same stocks when it last hit its high in October 2007—five have been removed and replaced since then. The Dow is entrenched as the barometer of the markets solely because it was the first one there so long ago. The S&P 500 is relatively better by nature of having about 17 times as many stocks, but it is still focused on U.S. Large Company stocks. Some of you may remember that the major headlines were using the NASDAQ as a market proxy during the tech bubble in the late 90’s. Well, the NASDAQ still is quite a ways off of its high around 4500 (currently around 3200), but that doesn’t mean a well-diversified portfolio hasn’t produced positive returns over that time period.

We know the Dow (or most other indices by themselves) is a terrible benchmark, but the more important reason that this new high is irrelevant is because it’s just another arbitrary number in a sea of noise. Does it really matter for young investors whether the value of the Dow is 1400, 1500, or 1600 today, when all historic and academic data tells us it will be much higher 20 and 30 years from now? Some of the older advisors I work with around here still joke about the early 80’s when it was a big deal for the Dow to be breaking 1000 and how that felt ridiculously high.

I started this post with why this new high is largely irrelevant, but I will finish with one caveat to that by directing you to this chart. I think the interesting thing here is how the most recent market decline is starting to look very similar to past market declines. In the moment, it can be extremely difficult to think the current market bottom is really just a long-term blip, even for those of us with faith in the markets. If there’s anything to take from this it’s the perspective that short-term highs and lows are ultimately just arbitrary points along your long-term path to financial success.

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