Dow 13,000 What Does It Mean?

As always, the mainstream media perked up about the stock market and investing world when the Dow Jones Industrial Average passed the made-f0r-headlines 13,000 level. The guys that write news story headlines love round numbers, maybe because everyone else does too. But, just like our infatuation with round number birthdays, such as turning 40, there is no real difference between Dow 12,956 and Dow 13,000, just like there is no real difference between being 39 and being 40 years old.

Is Dow 13,000 Meaningful?

Dow Hits 13,000The 13,000 number is purely psychological, but it does provide an opportunity to take a look at how the stock market and the economy are doing lately.

First, and foremost, most storied correctly noted that this is the first time the Dow has managed to gain the 13 K level since 2008. That is significant for two reasons. One, 2008 basically marks the beginning of the stock market crash caused by the bursting of the housing bubble and the subsequent financial crisis, all of which triggered what has become known as The Great Recession. Two, it means that maybe some investors should be seeing a recovery in their portfolios.

It is tempting to draw the conclusion that this means the market is back and fully recovered. However, that would be jumping the gun. While the stock market is a leading indicator, it’s pricing is currently based on pretty much everything going right in the near future. In other words, this level is precariously balanced between the Greek debt crisis lessening, the U.S. economy continuing to improve, and Washington D.C. not ruining the whole thing in a rash of election year politics.

Lost Decade Lost?

Perhaps more significant than the mental importance of a round number like 13,000 or what it means relative to 2008, is what this level is starting to represent in the bigger context.

Over the last few years, investment product marketers, particularly annuities, have made a lot of hay out of what is called, “The Lost Decade.”

The lost decade refers to the concept that if you invested some money 10 years ago, you have the same or less money than when you started. Of course, to them, the solution is an investment product with a guaranteed rate of return such as a variable annuity or equity-index annuity.

We’ll leave that discussion for another day, but let’s take a look at where we are with the recent market improvement.

The week of March 4, 2002 saw the Dow close at 10,572.49, significantly less than the market’s current 13,000 level. Now, that is hardly an eye popping return for the last 10 years, but it starts to throw cold water on that argument, particularly if the market continues to improve.

The other thing to notice is how quickly this whole thing happened. From that 13,000 of 2008 to under 7,000 in 2009 took less than a year. That scared a lot of people and many of them pulled their money out of the stock market or stopped putting money into their 401k plans or IRAs. Unfortunately, as history has shown time and again, that was exactly the wrong move.

From the 6,600 level in March, 2009 the market made a wrenching set of moves up and down shaking confidence even further. But, given the benefit of hindsight, the market essentially climbed right up from that low to over 10,000 by the beginning of 2010. 2011 started around 11,500 and now, in 2012, we are talking about 13,000.

However, there has been no “all clear.” No one says the economy is out of the woods. It is only recently that unemployment has started to come down and that other economic statistics have started to go up. In other words, if you have been waiting for things to get better or more stable before you moved back into the market, you are already too late. This is why most people never get the 10 percent historical return in the stock market. When you pull out when things are low, chances are you don’t get back in until they have already recovered.

What will the next 10 years bring? I don’t know, and neither does anyone else. What I do know is that if you maintain the proper asset allocation, rebalance  your portfolio annually, and stay invested, you’ll be richer than you are today.

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