Originally published in CNBC
By Debra Silversmith
Dow 20,000 finally happened. But does it matter?
Watching for the 20,000 level on the Dow Jones Industrial Average had become an investing sideshow. At one point, the media was breathless as the DJIA inched, intraday, to less than one point away.
But just because the financial media obsesses on the Dow passing the latest big round-number record doesn’t mean the rest of us should follow its lead.
Celebrating Dow 20,000 or similar market events distorts investors’ expectations and sets them up for inevitable and needless disappointment.
Successful investing demands more than watching one U.S. large cap stock market average. It requires diversification, across asset classes, sizes, and borders. And sometimes mixing active management and alternative assets alongside passive vehicles.
Records on the Dow are doubly dubious because the index is notoriously not representative.
One way to measure its importance or lack thereof is to see how many mutual fund managers use it as a performance benchmark. A quick search in Morningstar reveals 1,233 domestic large cap funds investing in “blue chip” Fortune 500-type companies. Just four use the Dow as their benchmark. By comparison, 512 use the S&P 500.
The reason: The DJIA is highly concentrated and largely antiquated, failing to gauge accurately today’s diverse and increasingly technology-driven economy.
Moreover, using any stock index as a sole guide for investors’ performance is problematic because most investors hold a diversified portfolio that typically includes bonds and possibly smaller cap and international equities.
Of course, the media’s hyper-focus on “Dow 20,000” is understandable. It needs to attract eyeballs, and bombast does that best. Plus all journalists know that their audience wants a simple story. Hence, easy-to-remember records on the Dow draw more coverage than the recent LIBOR scandal.
But hasn’t the Dow been on a tear since the presidential election on Nov. 8? Surely that must mean something, right?
Let’s put the Dow’s performance in context. Between the election and Dec. 23, the Dow returned 9.1 percent. Over the same time, returns for the S&P 500, international stocks, and bonds were 6.1 percent, -0.3 percent and -2.7 percent, respectively. And a more realistic U.S. investor performance would be that of a 60/40 portfolio (40 percent large cap stocks, 20 percent foreign stocks, 40 percent bonds). The return: 1.8 percent.
Sounds meager when the media has us focused on the Dow. Don’t fret. That’s still a very healthy return for just six weeks, annualizing to better than 15 percent.
Bottom line: While “Dow 20,000” makes a good story, it’s an incomplete one.
And, by the way, if you happened to miss the magical moment when the Dow slid past 20,000, don’t worry. You’ll likely get a second shot and maybe several more. The Dow, you may recall, crossed above 10,000 in 1999, 2000, 2001, 2002, 2003, 2009 and 2010.
Commentary by Debra Silversmith, the chief investment officer of First Western Trust.