A majority of my conversations with clients, prospects and friends have centered around the market reaching the mythical 14,000 level on the Dow. Do I buy here? Do I sell? The answer is what do you qualify as high? In 2007 the Dow reached these levels but the price to earnings on the average was 30. Today it is 14 with interest rates at historical lows. So again, what do you qualify as high?
One of the more common behavioral mistakes we make when it comes to investment decisions is the tendency to anchor to a certain value or price. When we focus on or anchor to a price, it can lead to costly blunders. Focusing on what you consider a high price can hurt your investment returns. When you use what we define as a mental anchor to a price or an index level it becomes meaningless based on current valuation.
So the next time you hear that we are going to 15,000 or 17,000 I want to think about a couple of things:
- The Dow is a stock market index of only 30 stocks, not the stock market as a whole. Does it really make sense to base your financial decisions based on 30 stocks?
- The market is now a world market and portfolios should be allocated in that matter. In fact, most portfolios today have very little exposure to the Dow 30.
Therefore, index levels should have little importance on investing. Valuation and price is what is important.