Dow at 40,000: Regret Should Be a Motivator for Investors.

Round numbers seem to carry more weight. Retailers never price items at $20, $100, or $1000. Instead, they use prices like $19.95, $99, or $990, as if $19.95 significantly differs from $20. Investors apply the same logic to the stock market. If a stock is at $99, when selling, an investor will probably hold out for $100. When the DOW hit 40,000, it made headlines, unlike when it reached 39,950. A quick search shows plenty of Dow 40,000 hats for sale, but none for Dow 39,000.

 

Interestingly, the S&P 500 is more widely used for performance comparisons, yet its milestone of 5,000 recently passed with little fanfare. Why do we place such emphasis on round numbers? And why does the Dow get more attention than the S&P 500, despite the abundance of S&P 500 index funds compared to only a few Dow 30 index funds?

 

From 1966 to 1982, the Dow struggled to stay above 1,000. But after 1982, it saw significant growth, reaching 10,000 by 1999—a tenfold increase in less than two decades. Dow 10,000 was celebrated with hats from the New York Stock Exchange, and again with Dow 20,000 hats (I have both). However, as we continued hitting larger round numbers, the excitement diminished, and the NYSE stopped selling hats. Investors now generally expect higher markets, which is the key takeaway.

 

Imagine it’s June 1981, and the Dow is at 976. You know with absolute certainty that the stock market will reach 40,000 in 42 years. If 40 years seems too long, consider January 2000, when the Dow was at 10,700. Knowing it will eventually reach 40,000, you would likely invest every spare dollar, using declines to invest even more. While waiting, you’d also receive dividends, increasing your returns by more than 8 to 1 in 24 years. You’d be fully invested.

 

If you started your career in 1981 and now just watched the Dow hit 40,000, you might wonder why you didn’t keep things simple. Instead, you probably spent years trying to predict market movements, often guessing wrong. Reaching Dow 40,000 prompts reflection: What if Dow 130,000 is next? There are no guarantees, but if you believe in continued economic growth, this is not unreasonable, maybe even conservative.

 

A 5% annual return for the next 24 years is almost Dow 130,000, (not including dividends which would make the total even higher.) Though not guaranteed, this assumes a lower return than the past 24 years and much lower than since 1981. So, what should you do? Think about your future self; history has once again shown that stock prices eventually reflect the economy. If you believe that staying somewhat conservative is acceptable, continue your current strategy. But if your future self might regret not staying fully invested due to worries about interest rates or economic downturns, then don’t outsmart your future self—stay invested.

Observations On the Market No. 395