Last week as the Dow crossed 10,000 again, I saw some serious chatter about this milestone, the press celebrating and even the traders on Wall Street wearing Dow 10,000 2.0 caps on their heads. A number of people pointed out that this number gets far more attention than it deserves. Will you do anything different now that Dow broke 10,000? Will you buy more stock, sell your stock? Remember, the Dow peaked at over 14,000 in October, 2007. So what does 10,000 really mean? Nothing at all.
What I really want to discuss is the odd nature of the index itself. It completely ignores the dividends of the underlying stocks. In real life, you just can’t ignore those dividends. By going to Yahoo Finance and looking at pricing on DIA (the Dow Jones ETF), we find that 10 years ago, on Oct 15, 1999 the closing price was 100.00. (equal to a Dow 10,000), but you can see the adjusted close of 82.14 tells a slightly different story. This means that over these 10 years, the Dow stocks are not exactly flat, but have gained 21.74% over this period. Before you dismiss this as trivial, consider that on a million dollar retirement portfolio, this is nearly $20,000 per year on average from these dividends. $20,000 you don’t need to draw from your original principal. If you are still working and in the ‘saving for retirement mode,’ you gain from the benefit of dollar cost averaging, as well as from reinvesting these dividends.
What I’ve ignored in this discussion is the benefit that you’d see from rebalancing your portfolio each year, keeping the stock/bond ratio in a certain proportion in line with your risk tolerance. The subject of a future post.