The Dow finally did it: it topped 20,000 for the first time. What does this development mean for the equity market and your portfolio?
Ultimately, it may not mean very much.
Does it signal that 2017 will be a great year for equities? Maybe. On the other hand, the Dow Jones Industrial Average includes only 30 companies, and the ones whose shares are worth the most exert the most influence on the performance of the index. Some investors consider this a flaw. The S&P 500 is seen as a better barometer of the market – it is about 17 times larger in terms of breadth, and as a market-weighted index, it is most influenced by the performance of its largest firms rather than its most valued ones.1
Does it indicate that equities are overvalued? Some analysts believe that it does. Then again, if the Dow climbs 400-500 points this quarter, that argument will seem premature. The Dow has averaged a 7% annual gain during its long history, so if it ends 2017 above 21,000, that would not be extraordinary.1
Feel free to celebrate this Dow milestone along with Wall Street; just remember that the real numbers to keep your eye on are your personal investment returns and the amount of your retirement savings. Marvel at the market’s recent climb, while realizing that this landmark event need not prompt change in your long-term investment and wealth accumulation strategy.
Michael Canet is a Registered Representative with TCM Securities, Inc. and can offer securities through TCM Securities, Inc., Member FINRA/SIPC.
1 – fool.com/retirement/2017/01/03/dow-20000-what-it-means-and-what-to-do-next.aspx [1/3/17]