In January of this year, the Dow Jones industrial average closed above 11,000 for the first time since 2001, causing much optimism among investors. However, as the Dow continues to hover around the 11,000 mark, the words “psychological barrier” seem to be everywhere. So, what exactly does it mean to say the 11,000 mark is more of a psychological milestone than anything else?
As the longest-running major market index, the Dow has a strong symbolic value, and gets a lot of attention from investors, the media and the general public. But as a collection of only 30 blue-chip stocks selected by Dow Jones & Company, it’s a somewhat small index — not the broadest measure for the market.
Additionally, the 11,000 mark is still about 6% lower than the Dow’s record high of 11,722.98 set in January 2000. A bigger milestone for the Dow will arguably be when it actually breaks its previous record.
As you look at the Dow from a historical perspective, it’s important to consider inflation. Remember, money can be expressed in nominal terms or inflation-controlled terms. For example, if you purchased goods or services equaling $10,000 in 2000, it would cost you more than $11,700 to make that same purchase in 2006, according to government calculations. Many economists feel that inflation should also be considered when looking at the Dow. If you were to adjust for inflation, the Dow would have to rise to more than 13,000 today to be on par with the high point it hit six years ago.
Despite the fact that 11,000 is only a number, reaching that mark still means that the economy is moving in the right direction — it’s a number people want to see. The situation was similar 30 years ago when the Dow neared the 1,000 mark (finally hitting it in 1982), and will undoubtedly continue to be the case as the Dow reaches new record highs in the future. It’s also important to remember that while the Dow still sits below the record it hit during the tech boom, it has certainly improved from its low of 7,286.27 in October 2002.
Whether the markets are approaching a record high or a psychological milestone, just bear in mind, not all investments respond to the same events in the same way. Investment decisions should not be based on emotion or a single event. It’s essential to diversify your holdings among a wide array of stocks, bonds, government securities and money market funds. Balancing your mix of investments in line with your risk tolerance will help you make progress toward your long-term financial goals.