20,000 is just a number, say money experts
BY: ROSS WILLIAMS
The Dow Jones Industrial Average crossed the 20,000 point mark for the first time in history yesterday.
But Kenneth Baer, managing partner at east Cobb’s Baer Wealth Management, said people in his office were not breaking out the champagne.
“We’re certainly happy that the market’s up and our clients have exposure to the U.S. market, but the Dow is only 30 stocks,” Baer said. “And the way it’s configured is very bizarre too, so it’s really not even a very good metric of how the market is doing. The fact that it hit 20,000 is great, but it really just means nothing.”
Baer said the Dow is not a good metric because it includes just the price of shares, not the market capitalization — the total market value of all a company’s shares.
Though 20,000 may be just a number, Baer said the milestone may be good for consumer confidence, and other experts agreed.
“There are sometimes these psychological effects, breaking through a number like this, if they can stay above it,” said Kennesaw State University economics professor Roger Tutterow. “But for the most part, it’s important not to overstate what this means.”
Tutterow also said the Dow is not the best measure of the market.
“It’s important to recognize that the Dow is only 30 stocks,” he said. “They’re 30 large stocks. Traditionally, the industrial average is made up of mostly industrial-oriented companies. That’s not the case anymore. But there are other indices such as the S&P 500, which obviously has 500 stocks so it’s a much broader portfolio, (that are) probably a better proxy for how the overall market is doing.”
Bill Lako, managing director at Kennesaw-based Henssler Financial, said crossing the milestone is nice, but what happens in the world of politics will have a bigger impact on people’s wallets.
“I think it’s significant in that in ’08 and ’09, the Dow fell to like 6,500 or something, and it’s been not even a decade later and we’re already back and above an all-time high of 20,000,” he said. “From a perception point of view, it’s good, it’s important. ... But what matters is earnings and how well the economy is growing and what President (Donald) Trump does in the first 100 days.”
Tutterow said optimism about the Trump administration likely played a role in the timing of the milestone.
“I think there is a sense that the political environment has changed in a way that is more likely to have a supportive effect,” he said. “That could be through possibilities of reductions in corporate tax rate, which would raise the after-tax cash flows to investors, or perhaps it’s a belief that economic growth could firm if in fact the regulatory environment is moderated.”
Lako said optimism about President Trump played a major role, though he also listed some other factors.
“I think the other side of it is that you’re going to see GDP growth in the fourth quarter be stronger than most expected,” he said. “Earnings for the S&P 500 are strong. And Christmas was good. It was not a bad time to be in holiday sales.”
Regardless of why the Dow crossed 20,000 Wednesday, the experts agreed not to let the milestone radically change your financial plan.
“If you have a proper plan in place and you’ve invested based upon your time horizon for when you might need cash out of your account, then I wouldn’t do anything different,” Lako said. “If you’re thinking you’re going to wait until the market corrects before you get in, that’s probably a fool’s game. I would not do that.”
Baer said sound financial advice will remain sound even in a world where the Dow has passed 20,000.
“You need to remain diversified,” he said. “You need to remain diversified no matter what. Especially make sure you’re protected between risky and safe assets in case things go the other way so that you’re not going to take as big a hit.”
Baer said in addition to remaining diversified, investors should also be disciplined and avoid rash decisions when the market swings up or down.
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