Please see my previous post New Highs in the Dow Part I – Indifference and Inevitability
The Dow is going to 36,000.
“What?” you say. “How could you make that prediction? How could you embrace the kind of crazy-headline-grabbing assertion that made fools of earlier market prognosticators? How dare you!”[1]
“You’re just shilling like all those other stock market bulls!”
Now wait a minute. How dare I?
Ok. You want to play games? You want to play rough?
Say hello to my little friend, “Compound Interest.” [2]
Remember the formula to convert today’s present value (PV) into tomorrow’s future value (FV), through an assumed annual return (Y) and a number of compounding years (N)?
FV = PV * (1+Y)N
If the Dow is roughly 14,000 today, it’s only a matter of time and an assumed annual return before we hit Dow 36,000. Or 21,000. Or 57,000.
I mean, seriously folks. Plug in an annual return and a time horizon, and I’ll tell you when we’re hitting that Dow target.
6% annual return, 14 years? Boom! Dow 21,000!
2% annual return, 6 years? Boom! Dow 15,700!
12% annual return, 17 years? Boom! Dow 96,000![3]
I mean, ultimately, who knows, and who cares?
But here’s what I do know:
- The aggregation of companies that make up broad equity indices will offer a positive return on invested capital. Hundreds of thousands of smart workers (or in the case of the S&P500 or Russell 2000 – millions of smart workers) go to work every day to help generate a positive return on equity capital invested in Dow Jones Industrial companies. To bet against a positive return on a broad portfolio of equities – in the long run – is to put your money on low probability outcomes.[4]
- In the long run[5], broad equity indices will afford a higher return than risk-less assets like bonds. If you need to build wealth in the long run, you probably cannot afford to be in bonds, as I previously wrote here.
Please see my previous post, New Highs in the Dow Part I – Indifference and Inevitability
And my next post New Highs in the Dow Part III – What should I do?
[1] Like these poor fools with their 1999 best seller: Dow 36,000: The New Strategy For Profiting From the Coming Rise in the Stock Market. And no, I haven’t read it and probably won’t, as again, it came out in 1999. Which made them look foolish. And yet also perhaps wise, as long as they allowed for a long enough time horizon.
[2] You’re supposed to imagine me saying all this with Al Pacino’s Cuban accent in Scarface.
[3] Admittedly, this last scenario isn’t likely. But if we get 10% annual inflation, a 12% return on stocks seems reasonable. And yes the returns will be largely nominal, with a huge reduction in purchasing power. But, hey! 96,000 Baby!
[4] Of course we should be empirical skeptics, cognizant of black swans in any particular scenario. Species-ending meteors do impact the Earth, periodically. So allocate 5% of your portfolio to Taleb’s Universa or whatever. But with 95% of your long-term investment capital, just try to do the simple, boring, thing. Trust me and embrace the sophistication that exists beyond complexity.
[5] In the short run (< 3 years), and possibly the medium run (5-10 years) risk-less assets beat stocks – occasionally. Not in the long run.
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