Me and the Dow
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.The post Me and the Dow appeared first on HumbleDollar.
