The Myths of 14,000

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:

  1. 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?
  2. 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.

Bill

Advertisements

About billriley

Chief Executive Officer, Chief Compliance Officer A co-founder and shareholder, William Riley is a 33 year industry veteran, who observed, many years ago, that over time institutional investors typically outperform individual investors while accepting less risk. In his role as Chief Executive Officer, Bill works tirelessly to make the wealth management strategies used by the world’s wealthiest families and largest institutions available to our firm’s individual clients. Bill combines fundamental and technical analysis to minimize investment portfolio risk and maximize potential returns. He uses a variety of non-correlated asset classes, including alternative investments, to minimize portfolio volatility and seek absolute returns in down or flat markets. Finally, Bill believes in a comprehensive approach to wealth management that fully coordinates and seamlessly integrates portfolio management, risk management and asset protection, trust, estate, tax and charitable planning. Prior to co-founding Riley Wealth Management ,LLC, Bill held management positions at Merrill Lynch, UBS, Raymond James, Paine Webber and J.C. Bradford. Bill founded Fort Worth branches for Raymond James and J.C. Bradford. Prior to entering the financial services industry, Bill ran his families closely held businesses. Bill’s experience operating family businesses combined with his wealth management experience makes him uniquely qualified to advise entrepreneurs and business owners on a variety of matters including complex and sensitive issues relating to business succession. Bill’s degrees and designations included a Masters Degree in Business Administration (MBA), the Chartered Financial Consultant designation (ChFC), the Chartered Life Underwriter designation (CLU) and the Wealth Management Specialist designation (WMS). A Fort Worth native, Bill is a TCU alum and active in many civic and charitable organizations. Bill and his wife, Marsha, now reside in Colleyville, and they have four grown children and four grandchildren. When he is not working on portfolios or studying financial markets, Bill can be found on the golf courses of Ridglea Country Club.
This entry was posted in Uncategorized. Bookmark the permalink.