FREE NEWSLETTER
WHEN I WROTE ABOUT the Dow Jones Industrial Average reaching 35,000 in 2021, it’ll surprise few to hear that I—like the stock market—was euphoric. I’ll confess that in 2022, as stocks plunged, I felt silly for having written the article.
But here I am again, writing about the latest milestone for our old friend. After flirting with the number in mid-March, the Dow hit an intraday high topping 40,000 on May 16 for the first time in its history. The next day, it closed above that level for an all-time high.
I agree with a recent Wall Street Journal article that the Dow is a “terrible” index. That’s mostly because it’s a price-weighted index, as opposed to its cousin, the Standard & Poor’s 500, which weights companies according to their total stock market value. Nevertheless, I—perhaps like many of you—have followed the Dow almost my entire life, even when I didn’t really know what it was.
The reason for my Dow 35,000 article: I was trying to gauge at what Dow level I’d have enough to retire. I was using an admittedly unscientific approach to come up with that figure. Three years ago, I mentioned that my wife and I wanted to retire in 10 to 15 years. We’re still on track for that goal, which is now nine to 12 years’ away. I postulated that at Dow 50,000 we might have reached our goal.
Our magic Dow number is still a bit tricky and unclear. Let’s assume our investment nest egg is half of what I’d like it to be at retirement. In other words, I need it to double to retire. Using the rule of 72, if the Dow notched 7.2% a year, including dividends, the nest egg would double in 10 years. At 10%, it would double in 7.2 years. Reinvested dividends, of course, aren’t reflected in the headline Dow number.
What if folks don’t think market returns will be so high, and want to use less rosy projections? And what about dividends? With the Dow companies’ dividend yield at roughly 2%, if the Dow’s index level increased by 4% a year, that would result in a 6% compound growth rate. What then?
At that rate, a nest egg would double in roughly 12 years, right on track for yours truly. Because dividends accounted for a third of that growth, we know that the Dow won’t have gained another 40,000 points, landing at 80,000. So, if we discount the 40,000-point gain by one-third—the amount that dividends would account for—that would leave us at Dow 66,667.
What this analysis doesn’t reflect is any additional savings added along the way. The last time I was roughing out this math, I guessed that Dow 50,000 might be the magic number for my wife and me. Given that we continue to invest considerable sums each month, that 50,000 figure is still probably about right. Much of this, of course, will depend on how quickly the Dow reaches 50,000. If it happens in 20 years, that will not be very satisfying for me or many investors. If it happens in 10 years, I’ll likely be celebrating. But again, the Dow number is not really the key to our investment success. Rather, it’s the annual compound growth rate.
Because our youngest child won’t graduate high school for 12 years, my wife and I will likely continue working at least through then before enjoying an “early” retirement starting in our mid-50s. While Mr. Dow and I still have a little way to go before we reach that magic number, I can’t help feeling a little excitement at the most recent milestone.
And even if the market takes a hit after this record high, I’m confident that we’ll continue with our investment plan of steadily buying into the market every month. If the Dow does plummet over the next year or so, I’ll try not to feel too sheepish this time—and at least I’ll have the comfort of knowing our new savings are buying at cheaper prices.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben’s made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts. Check out his earlier articles.
Ben, you sound like a man with a plan, but remember, “Man makes plans…and God Laughs.”
I subscribe to the belief any plan will work as long as you work your plan…and the good plan that is implemented is superior to the perfect plan that isn’t.
At my age, and for the past decade or more, I have been focused in the S&P, and not the Dow, as I am invested in Indexed Funds. Your “plan” however is sound, whether you focus on the DOW or the S&P.
Good luck and happy retirement, whenever it comes.
I remember that in 1964 in an Econ 1A class a big discussion about the DOW, which was then in the 700 to 800 range, and whether or not the DOW would ever hit 1000…….
As Sam Spade said, “the stuff dreams are made of”.
I hear you. I hope to look back one day and think of the Dow at 40,000 as cheap! Maybe I’ll be on my yacht.
Yep, even the local news concentrates on the Dow rather than the S&P, something about the Dow. I used to attempt extrapolating market growth but eventually gave up on what I had no control over. Instead I focused on eliminating and staying out of all debt, which enabled us to save like crazy and still have some money for vacations and other fun stuff. That worked out well for us and we were fortunate not to have our “plans interrupted”.
I’m with you. My first HD article was about paying off my house early. I don’t regret it.
Ben, We won’t know when the DOW hits 50k until it actually crosses that mark. But, you sound like a man with a plan. That puts you ahead of most. Keep saving regularly, add a pinch of flexibility, and I am confident you will meet your goals!
Eye is on the prize, my friend.
The Dow is always discarding unsuccessful stocks, and replacing them with better ones. It you could do this – yeah, I’ve owned Apple for the past 30 years, not General Electric – your portfolio would be fabulous.
Right. I think the WSJ article alluded to this. Once a stock has been successful it gets added, but that’s performance chasing. Sometimes it works out, but sometimes the winners don’t keep winning.
Ben, nice article. The Dow does have a certain aura. I remember very early in my career, one of the older engineers would come by my manager’s office every day at lunch to update him on the Dow’s price, and GE’s stock price. They both retired in a few years with healthy pensions and investment portfolios. Since then it’s been hard not to look at daily market prices. Good luck in your retirement journey.
Thanks. Well, you can tell this article was written by a human due to my terrible timing and inability to do math well. The Dow has already taken a hit since I wrote it! Oh well, we soldier on.
What is so surprising? The markets go up, the markets go down, they always have, they always will.
My motto thanks to John Bogle, “Ignore the Noise!”