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The 10,000 Wall…
By JLP | February 9, 2010
Here’s an interesting tidbit I learned in a front page article on yesterday’s market action in today’s WSJ:
The 10000 mark on the Dow has been a frustrating milepost for American investors. The benchmark has crossed above or below the 10000 mark 57 times since first rising above that level in 1999—effectively meaning it has made no progress in more than 10 years. The latest decline could deal another blow to optimism that stocks will continue to rise.
Did you catch the part, “effectively meaning it has made no progress in more than 10 years?” The following graphic I put together illustrates this point:
Let it be noted that the Dow closed above the 10000 mark today so the number is now 58, not 57 as the quote mentions. Also, it’s important to note that these numbers do not include inflation, which would make them worse.
The only strategy that works during times like these—other than possessing a “crystal ball” that tells you when to get in and out of the market—is dollar-cost averaging. So, those of us saving for retirement can take solace in the fact that this sideways market is helping us meet our future needs (as long as the market eventually starts going back up).
Topics: Investing | 11 Comments »
February 10th, 2010 at 9:53 am
The Dow doesn’t include dividends, so it understates market performance by several percentage points.
February 10th, 2010 at 11:45 am
‘the only strategy that works during times like these—other than possessing a “crystal ball” that tells you when to get in and out of the market—is dollar-cost averaging.’
Yes, DCA is pretty much the only strategy that works for long-term investors.
I don’t like that the WSJ is using the Dow as the gauge here, since it is a price-weighted index — would prefer to use the S&P 500 instead (market-weighted). You can’t purchase an index-fund that tracks how the Dow is calculated (AFAIK), so it’s a relic and shouldn’t be relied on. The Dow index might as well be called the IBM index, since it is that companies stock price that is the major influence of the Dow (IBM has the largest stock price, but is not the largest in market-cap).
February 10th, 2010 at 11:46 am
#1 Dave) Yes, the Dow does include dividends (divisor is tweaked everytime one of the companies make a dividend payment) — I outlined the problem with the Dow in my other post (price-weighted instead of market-cap weighted).
February 10th, 2010 at 1:08 pm
See – this is is the issue I have when financial advisors try to explain that stocks are a good “long term” investment. I would argue that stocks are really only a good investment if you are working with money you don’t ever *really* need. Maybe it’s just bad luck for my generation or something, but the year before I went to college the bottom fell out of the market and $100,000 of my “college fund” was lost. 9 years later when my dad had finally built back up his retirement fund he was knocked right back to where he started. I think the notion that people can honestly trust their RETIREMENT to the market is misguided.
February 10th, 2010 at 4:08 pm
Correction to my #2 post: when I say ‘DCA’ is better — I mean to invest the same amount every paycheck, and ignore whatever may be going on in the market/news/charts, etc. Just buy and never sell (index funds) — you will invariably come out better than someone trying to get lucky timing the market with sell-orders (over the long-term).
February 10th, 2010 at 4:32 pm
#4 Melanie) ouch! You really shouldn’t have any money invested in stocks if you need to sell it within a short timeframe. I doubt any FA would have ever recommended your college fund to be invested in stocks 1-year before you planned to start college — except for maybe a small portion for the money planned for your senior year (5-years out).
Same goes for retirement, you should have the first XX years in cash/cash-equivalent CDs or something. Only money needed 10 years (or more) out should be in stocks — it is just too volatile otherwise. Just like you invest some money every paycheck, you’d do the reverse and start making your investments more and more conservative before the money is actually required to be taken out.
Now if you are counting on x% growth to meet your goals, then you just aren’t saving enough (or didn’t start early enough) — and hence why you might consider taking that risk…
February 10th, 2010 at 6:15 pm
#3 BG) I think that you will find that stock dividends (splits) are included in the DOW, but cash dividends are not. The total return on the DOW is the index + any cash dividend yield.
Historically, the Dow Jones dividend yield has fluctuated between 3.2% (during market highs, for example in 1929) and around 8.0% (during typical market lows). The highest ever Dow Jones dividend yield occurred during the stock market collapse of 1932, when it exceeded 15%.
With the decreased emphasis on dividends since the mid-1990s, the Dow Jones dividend yield has fallen well below its historical low-water mark of 3.2% and reached as low as 1.4% during the stock market peak of 2000.
The current dividend yield is 2.88%.
February 11th, 2010 at 10:45 am
#7 Dave) Hmm, Investopedia says:
“…While most market indexes are market-capitalization weighted, the DJIA (and other Dow Jones indexes) are price-weighted. That is, the DJIA was originally calculated by simply adding up the price of Dow components and dividing by the number of stocks in the index. (That’s why it’s called an average.) However, when companies had stock splits or gave out stock dividends, the stock prices changed even though the value of the company didn’t. The index, because it is price-weighted, would be distorted. To solve this problem, Dow Jones introduced the Dow Divisor. It’s modified downward to reflect corporate actions that don’t fundamentally change the value of the company…”
just google search “dow divisor dividend”. The interesting thing about the divisor, is that it is below 1.0 now, so it is actually a multiplier. A $1 change in a stock price, moves the Dow 7.56 points currently.
February 11th, 2010 at 6:10 pm
#8 BG) Notice that the Dow is adjusted for stock dividends, i.e., dividends paid in additional shares of stock. As I said before, cash dividends are not included.
February 12th, 2010 at 12:31 am
Who was president and who controlled congress for all those wealth destroying years?
February 12th, 2010 at 11:28 am
#9 Dave) I got ya — the Dow is adjusted for dividends but it is not tracked as if you are re-investing those dividends. You’d use the DJIA “total returns” version of the index for that. Thanks for clearing that up.
#10 Hogan) Lol, not politics again. I don’t think there is much correlation between stock returns and who was president (or controlled congress). Even I couldn’t go _that_ far…heh.