Stop Acting So Surprised That the Dow Just Hit 23,000
Chalk up another historic day for what could very well be the most historic stock market index on the planet, the Dow Jones Industrial Average (DJINDICES: ^DJI). The 121-year-old index wound up gaining 40 points during Tuesday's trading session to close at yet another all-time record 22,997.
The Dow crossed 23,000!
But the real news is what happened during Tuesday's trading session. Thanks to a strong earnings showing from healthcare conglomerate Johnson & Johnson, which pushed higher by $4.67 (no small move for the low-volatility healthcare giant), the Dow briefly eclipsed the 23,000-point mark, hitting an intraday high of 23,002. Since bottoming out in March 2009, the Dow has now gained better than 250%.
As you might have imagined, the psychological move higher in the Dow drew a lot of coverage from the media outlets. Practically every news agency you can think of crowed about the Dow's crossing the 23,000 plateau for the first time ever, after having just crossed the 22,000-point mark just 11 weeks earlier. But I have news for you -- there's really nothing surprising at all about seeing the Dow hit 23,000. If anything, it's par for the course over the long term.
Why is everyone so shocked the Dow hit 23,000?
Historically, the stock market has returned an average of 7% per year, inclusive of dividend reinvestment. Running some very crude math, this means invested wealth will, on average, double about once a decade. However, that doesn't mean stocks go up forever. We saw in both the dot-com bubble and financial crisis that wealth can be lost in the blink of an eye. But sticking with high-quality companies over the long run has been shown to work wonders.
A quick look at the performance of the Dow since October 1984 shows that despite Black Monday in 1987, when the Dow lost 22% of its value in a single day; the bursting of the dot-com bubble; and the Great Recession, which more than halved the Dow, America's most iconic stock index has gained an average of 9% annually over the past 33 years. This shouldn't be surprising, because high-quality companies tend to grow in value over time.
What's more, everything is relative when we're talking about "points" in the Dow. Back in 1987, a 508-point Black Monday drop was unlike anything that investors had seen before. Today, a 508-point drop would mark a 2.2% decline, which doesn't even come close to breaking into the Dow's 20-worst days of all time on a percentage basis. Therefore, while a 1,000-point move in the Dow in the 1990s might have equated to 20% or 30% move higher in the index, a 1,000-point move today is nothing more than roughly a 4% increase. That's not all that special or surprising -- it's par for the course given what the Dow has done over the past 121 years. In fact, at this pace it's possible we could see Dow 100,000 by the year 2040, or sooner.
Stay the course
In other words, the points I'm trying to drive home are that record highs are somewhat expected over time, and that investors shouldn't be altering their investment habits just because the Dow hit yet another new all-time high. History shows that if you try to time to market and jump out near "all-time highs," you'd probably wind up missing out on some very prolonged bull-market rallies.
Instead, I'd suggest investors use this time to do two things: review your investment thesis for each and every asset you own, and continue to add to companies you believe in over the long term.
Though you should review your investment thesis for all of the stocks you own from time to time, an all-time high or psychological point barrier is a great time to do so in order to calm your nerves and to keep from doing something rash, like selling a high-quality stocks for a bad reason. When reviewing your investment thesis, simply ask yourself why you invested in the company in the first place, and if those reasons still hold true. If they do, you have no reason to sell. If they don't, only then might it be time to consider parting ways with your investment.
Second, consider regularly adding to your portfolio and buying stocks. As noted, stocks tend to increase in value over time. However, data also shows that stock market corrections and bear markets are a perfectly normal part of the cycle, too. Though we can't know with any certainty when those moves lower are coming, we can lower the cost basis of what we own by buying stocks on a regular basis, regardless of where the stock market is valued.
If you're buying stocks regularly and reviewing your investment thesis from time to time, you're probably going to be a happy camper come retirement.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.