dow jones industrial average http://www.wisebread.com/taxonomy/term/9909/all en-US 4 Ways to Keep Envy From Ruining Your Retirement Investments http://www.wisebread.com/4-ways-to-keep-envy-from-ruining-your-retirement-investments <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-ways-to-keep-envy-from-ruining-your-retirement-investments" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/bad_news.jpg" alt="Bad news" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>The stock market had a great year in 2017, with the S&amp;P 500 rising more than 19 percent. Did your portfolio do as well? If not, you may feel like you missed out. You may even be tempted to make some changes, going all in on headline-making companies that did well in 2017.</p> <p>But hold on. Just as scrolling through your social media feed can make you feel like you need to up your vacation game, reading about hot investments can tempt you to invest reactively instead of proactively, and that often does more harm than good.</p> <p>What's a person with investment envy to do? Read on.</p> <h2>1. Keep hot investments in perspective</h2> <p>If you pay any attention to investment news, you've seen plenty of headlines about the so-called FANG stocks, an acronym that represents Facebook, Amazon, Netflix, and Google (Alphabet). Other popular consumer-oriented companies include Apple and Microsoft. Each stock had a great 2017.</p> <p>Should those investments be part of <em>your </em>portfolio? Maybe, but the principles of wise investing would suggest buying them only as part of a diversified portfolio and only if you understand that what goes up quickly can also come down quickly.</p> <p>For example, in 2008, when the S&amp;P 500 fell 38 percent, many of these hot stocks also plummeted &mdash; some by more than 50 percent. (See also: <a href="http://www.wisebread.com/9-ways-to-tell-if-a-stock-is-worth-buying?ref=seealso" target="_blank">9 Ways to Tell If a Stock is Worth Buying</a>)</p> <h2>2. Keep a hot market in perspective</h2> <p>At the end of each weekday, there are news reports about how &quot;the market&quot; performed. In reality, such reports are usually about how the S&amp;P 500 or Dow Jones industrial average performed. Both are stock market indexes, but both are designed very differently &mdash; the S&amp;P 500 represents the collective performance of 500 of the largest U.S.-based public companies, and the Dow represents just 30 companies.</p> <p>The only investors for whom it would be fair to benchmark their portfolios against such indexes are those who invest solely in an S&amp;P 500 or Dow index fund.</p> <p>If you have other investments in your portfolio, you need to remember that &quot;the market&quot; is not the same thing as your particular portfolio. It's fine to view the market's performance as a general investing barometer. Just don't be envious if your portfolio doesn't perform as well, or overly confident if it performs better. (See also: <a href="http://www.wisebread.com/want-your-investments-to-do-better-stop-watching-the-news?ref=seealso" target="_blank">Want Your Investments to Do Better? Stop Watching the News</a>)</p> <h2>3. Keep your benchmark in mind</h2> <p>The best point of comparison to use when evaluating your portfolio's performance is a benchmark tailored to your age, goals, and risk tolerance. More specifically, it's the average annual rate of return that's part of your investment plan.</p> <p>If you don't have such a plan, it isn't that difficult to create one. Begin by completing <a href="https://retirementplans.vanguard.com/VGApp/pe/PubQuizActivity?Step=start" target="_blank">Vanguard's investor questionnaire</a>. It'll suggest an optimal asset allocation. From there, you can review the <a href="https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations" target="_blank">historical performance of portfolios</a> with various stock/bond allocations, which can help you choose a reasonable rate of return assumption for your own portfolio.</p> <h2>4. Get the best of both worlds</h2> <p>Once you know your optimal asset allocation, you can use index funds to create a diversified portfolio designed to share in some of the overall market gains, as well as the gains of individual hot investments.</p> <p>In fact, just investing in an S&amp;P 500 index fund enables you to do both. Of course, it gives you exposure to &quot;the market&quot; as defined by that index. But it also gives what may sound like a surprising level of exposure to the fast-growing individual stocks mentioned earlier.</p> <p>You see, the S&amp;P 500 is a &quot;market capitalization-weighted&quot; index, meaning each company that's included is represented based on the value of its outstanding shares. Because Apple, Alphabet, Microsoft, Facebook, and Amazon have done so well in recent years, they make up a disproportionate share of the index. For example, those five stocks account for nearly 13 percent of the Vanguard S&amp;P 500 index fund, VOO.</p> <p>However, even if your optimal asset allocation is 100 percent stocks, you'll probably want to diversify beyond an S&amp;P 500 mutual fund, perhaps including smaller companies through an extended market fund, and foreign companies through an international fund.</p> <p>Benchmarking your portfolio against headlines about this fast-growing sector or that hot investment will just cause you stress and may even hurt your returns. Instead, develop and follow a plan that includes a realistic assumed average annual return based on your circumstances and goals.</p> <p>Using the right benchmark will do wonders for your portfolio and your peace of mind.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F4-ways-to-keep-envy-from-ruining-your-retirement-investments&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F4%2520Ways%2520to%2520Keep%2520Envy%2520From%2520Ruining%2520Your%2520Retirement%2520Investments.jpg&amp;description=How%20to%20Be%20Successful%20as%20a%20First-Time%20Manager"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/4%20Ways%20to%20Keep%20Envy%20From%20Ruining%20Your%20Retirement%20Investments.jpg" alt="4 Ways to Keep Envy From Ruining Your Retirement Investments" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> of <a href="http://www.wisebread.com/4-ways-to-keep-envy-from-ruining-your-retirement-investments">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-does-the-stock-market-keep-going-up">Why Does the Stock Market Keep Going Up?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/this-one-mental-bias-is-harming-your-investments">This One Mental Bias Is Harming Your Investments</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-be-fooled-by-an-investments-rate-of-return">Don&#039;t Be Fooled by an Investment&#039;s Rate of Return</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-one-mediocre-investor-prospered-after-the-market-crash">How One Mediocre Investor Prospered After the Market Crash</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment dow jones industrial average envy gains hot stocks losses portfolios s&p 500 stock market Wed, 31 Jan 2018 10:00:06 +0000 Matt Bell 2087458 at http://www.wisebread.com Why the Dow Will Hit a Million, Eventually http://www.wisebread.com/why-the-dow-will-hit-a-million-eventually <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-the-dow-will-hit-a-million-eventually" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/businessman_building_business_graph.jpg" alt="Businessman building business graph" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>At an event earlier this month, Warren Buffett, one of the most successful investors of all time, revealed his prediction that the Dow Jones industrial average (DJIA) will be &quot;over 1 million&quot; in 100 years.</p> <p>With the DJIA currently sitting at about 22,400, is it even reasonable to think that the stock market could grow that much? Growth from the current value of the Dow to 1 million would represent an increase of about 45 times over. My first impression was that a value of 1 million for the Dow is very high, and Mr. Buffett must be either confused or overly optimistic to put forth such a prediction.</p> <p>But since this prediction came from someone who <em>clearly </em>has a good understanding of investments and the stock market, I decided to check out the math behind this prediction to see if it makes sense.</p> <p>An important part of Warren Buffett's prediction is the &quot;in 100 years&quot; part. One hundred years is a long time, and although it may be surprising, Warren Buffett's prediction of the Dow topping 1 million is actually quite reasonable given the historical performance of the market. In fact, the prediction of the Dow reaching 1 million in 100 years may even be <em>conservative</em>.</p> <h2>Here's the math</h2> <p>Let's look at what kind of growth rate would be required for the Dow to reach 1 million in 100 years. As I mentioned, the Dow would need to grow by 45 times its current value. When thinking about investment growth, it is informative to look at the growth in terms of the number of doublings that would be required.</p> <p>2<sup>n</sup> = 45</p> <p>n ln(2) = ln (45)</p> <p>n = ln(45) / ln(2)</p> <p>n = 3.81 / 0.693</p> <p>n = 5.5</p> <p>So the market value would need to double 5.5 times from its current value to reach 1 million. Let's look at this in the form of a table to make sure it makes sense:</p> <table> <tbody> <tr> <td> <p><strong># of Doublings</strong></p> </td> <td> <p><strong>Resulting Dow Value</strong></p> </td> </tr> <tr> <td> <p>0 doublings</p> </td> <td> <p>22,400 (current Dow)</p> </td> </tr> <tr> <td> <p>1 doubling</p> </td> <td> <p>44,800</p> </td> </tr> <tr> <td> <p>2 doublings</p> </td> <td> <p>89,600</p> </td> </tr> <tr> <td> <p>3 doublings</p> </td> <td> <p>179,200</p> </td> </tr> <tr> <td> <p>4 doublings</p> </td> <td> <p>358,400</p> </td> </tr> <tr> <td> <p>5 doublings</p> </td> <td> <p>716,800</p> </td> </tr> <tr> <td> <p>6 doublings</p> </td> <td> <p>1,433,600 (Dow over 1 million)</p> </td> </tr> </tbody> </table> <p>From the table above, you can see that doubling the current Dow five times yields 716,800, and doubling six times yields <em>over</em> 1 million, so the number of doublings for the Dow to reach 1 million must be somewhere in between. Our estimate of 5.5 doublings makes sense.</p> <p>So the Dow would need to double 5.5 times in 100 years &mdash; or in other words, it would need to double every 18.2 years: 100 years / 5.5 doublings = 18.2 years to double.</p> <p>The next step to checking out Mr. Buffett's prediction is to figure out what rate of growth would be required for the value of the Dow to double every 18.2 years.</p> <p>For a quick estimate, I turned to the &quot;Rule of 72.&quot; The Rule of 72 is a handy approximation to find how many years it will take an investment to double &mdash; simply divide 72 by the annual rate of growth. I flipped the Rule of 72 formula around to check the rate of growth required:</p> <p>72 / growth rate = years to double</p> <p>72 / growth rate = 18.2 years</p> <p>Solve for growth rate:</p> <p>72 = 18.2 x growth rate</p> <p>growth rate = 72 / 18.2 = 3.96 percent annual growth</p> <p>So the &quot;Rule of 72&quot; approximation tells us that an annual growth rate of 3.96 percent would be required to double the Dow every 18.2 years, which is the rate of growth needed for the Dow to hit 1 million in 100 years.</p> <p>If you don't want to settle for an approximation, or if you are just geeky in a cool sort of way, you can do a more exact calculation:</p> <p>2P = Pe<sup>Yr</sup></p> <p>2P = Pe<sup>(18.2)r</sup></p> <p>ln(2) = 18.2r</p> <p>r = ln(2) / 18.2</p> <p>r = 0.038 or 3.8 percent</p> <p>The approximation from the Rule of 72 matches pretty closely with the exact calculation, so it seems we have nailed down the rate of growth that is required for the Dow to reach 1 million.</p> <p>It turns out that that an annualized growth rate of 3.8 percent is well within the historical growth rate of the stock market over the past 100 years. The average rate of return from the stock market is typically considered to be as high as 7 percent.</p> <p>Of course the stock market does not march steadily along at an average rate of growth year after year. The market swings up and down from day to day and follows longer upward and downward trends during bull and bear markets. But over the long haul, the average trend for the stock market has been upward at a rate of well over 3.8 percent average growth over the past 100 years.</p> <p>In addition to the mathematical consideration of the rate of growth required for the Dow to reach 1 million in 100 years, another consideration is whether the world's people and natural resources will continue to sustain economic growth over the next 100 years. With development of exciting new technologies and emerging global markets to drive growth, it seems reasonable that the <a href="http://www.wisebread.com/why-does-the-stock-market-keep-going-up" target="_blank">stock market could keep going up</a>.</p> <p>So it looks like Mr. Buffett's thinking makes good sense as usual, and the prediction of the Dow 1 million makes perfect sense.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fwhy-the-dow-will-hit-a-million-eventually&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FWhy%2520the%2520Dow%2520Will%2520Hit%2520a%2520Million%252C%2520Eventually.jpg&amp;description=Why%20the%20Dow%20Will%20Hit%20a%20Million%2C%20Eventually"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/Why%20the%20Dow%20Will%20Hit%20a%20Million%2C%20Eventually.jpg" alt="Why the Dow Will Hit a Million, Eventually" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/dr-penny-pincher">Dr Penny Pincher</a> of <a href="http://www.wisebread.com/why-the-dow-will-hit-a-million-eventually">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-does-the-stock-market-keep-going-up">Why Does the Stock Market Keep Going Up?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-to-keep-envy-from-ruining-your-retirement-investments">4 Ways to Keep Envy From Ruining Your Retirement Investments</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-reasons-millennials-should-stop-being-afraid-of-the-stock-market">7 Reasons Millennials Should Stop Being Afraid of the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-are-income-stocks">What Are Income Stocks?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/is-dollar-cost-averaging-the-right-strategy-for-you">Is Dollar Cost Averaging the Right Strategy for You?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Financial News Investment 1 million calculations djia dow jones industrial average estimates growth math predictions stock market Warren Buffett Fri, 29 Sep 2017 08:30:10 +0000 Dr Penny Pincher 2028010 at http://www.wisebread.com Why Does the Stock Market Keep Going Up? http://www.wisebread.com/why-does-the-stock-market-keep-going-up <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-does-the-stock-market-keep-going-up" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/surging_business_0.jpg" alt="Surging Business" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Many people were taken by surprise when the stock market reached new highs after the 2016 election, with the Dow Jones industrial average (DJIA) breaking 20,000. But the recent record highs are only the latest in a long trend of stock market growth extending back well over 100 years.</p> <p>The average rate of return for the DJIA since 1896 is about 7 percent when adjusted for inflation. Looking at a broader representation of the overall stock market, the average rate of return for the Standard &amp; Poor's (S&amp;P) 500 index since it's inception in 1928 is about 10 percent per year.</p> <p>Of course, if you pay attention to the stock market, you know that stocks do not move steadily up all the time. Sometimes there are sudden market declines, such as the crash of 1929 that led to the Great Depression, or the 2008 collapse that led to the Great Recession. Sometimes there are long periods of market stagnation when stock prices do not go up much at all, such as during the 1970s. But over time, the long-term trend has been that stock values keep on pushing up, even after setbacks, and routinely go on to break record highs.</p> <p>What makes stock values keep going higher and higher?</p> <h2>Investors <em>think </em>stocks will go up</h2> <p>Investors who decide to put money into the stock market select individual stocks and stock funds based on the financial performance of the businesses in the portfolio. Ultimately, investors weigh the potential for a stock to go up versus the risk that it will go down during their investment window.</p> <p>Sometimes &quot;irrational exuberance&quot; seems to play a big role in driving stock prices. In a hot housing market, investors will pay essentially any price to buy a property if they are confident the price will go up, even if the price is not rational. Investors sometimes buy stock for the same reason &mdash; simply because they think someone else will pay more for it when they want to sell and they don't want to miss an opportunity to make a big gain. In some extreme cases, such as hot initial public offerings (IPOs), stock valuation seems to be driven by speculation without much solid financial basis.</p> <h2>Businesses have figured out how to make products for less</h2> <p>One way that businesses have become more valuable, and therefore garnered higher stock valuation, is by increasing productivity and efficiency. If a business can produce its goods and services at a lower cost, higher profits can be achieved.</p> <p>Businesses boost their efficiency by using automation, optimizing product designs and reuse, and merging or partnering with other companies with complementary resources and capabilities. The continuous effort by businesses to reduce their costs and run their business more efficiently keeps driving stock prices up over time.</p> <h2>Fancy new products (with higher profit margins)</h2> <p>Innovation and technological advances result in new products with higher profit margins than established products. Consumers will pay a premium to get the latest technology and newest capabilities. When a new type of product is launched, there is a window of time when little or no competition is available in the market. This is why the introduction of new products keeps driving stock values up.</p> <h2>Growing consumerism</h2> <p>In the old days, it was common for people to grow their own food, make their own clothes, and craft other household items such as soap and even furniture. When people were more self-sufficient and made most things for themselves, opportunities for businesses to sell products to customers at a profit was limited.</p> <p>Fast forward to today. The population has increased significantly, and most people buy products instead of making things themselves. As the number of consumers grows, and the demand by consumers for more and more products increases, so does profit for businesses that make and sell products.</p> <h2>Why did stocks unexpectedly go up after Trump was elected?</h2> <p>After an initial tumble in stock futures following the 2016 election, the stock market rallied during the following months and hit a record high, with the DJIA reaching 20,000 for the first time ever on January 25, 2017. Why did the stock market go up after the election of an unpredictable new leader?</p> <p>Markets typically react negatively to uncertainty, and that is what happened when the S&amp;P 500 and DJIA market futures fell around 4 percent on the night of the election. But soon, stock prices started rising again. Investors apparently feel that the new president will follow traditional Republican strategies of lowering taxes on businesses and reducing environmental, safety, and consumer protection regulations, resulting in higher potential profits. Also, the possibility of increased military spending and spending on huge infrastructure projects raises expectations for short-term economic growth among investors.</p> <h2>Will the stock market keep going up?</h2> <p>Stepping back and looking at the potential for stock market growth over the coming decades, the elements for continued stock market growth seem to be forthcoming.</p> <p>New levels of automation promise to drive productivity and reduce the cost to produce and deliver products to consumers. Technical innovations such as renewable energy, virtual reality, augmented reality, and medical breakthroughs appear poised to result in highly profitable new products. New consumers are likely to enter the marketplace as developing economies grow, increasing overall demand for manufactured products and driving business profits higher.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/dr-penny-pincher">Dr Penny Pincher</a> of <a href="http://www.wisebread.com/why-does-the-stock-market-keep-going-up">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-ways-to-keep-envy-from-ruining-your-retirement-investments">4 Ways to Keep Envy From Ruining Your Retirement Investments</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-the-dow-will-hit-a-million-eventually">Why the Dow Will Hit a Million, Eventually</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/dont-be-fooled-by-an-investments-rate-of-return">Don&#039;t Be Fooled by an Investment&#039;s Rate of Return</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-we-headed-toward-a-bull-or-bear-market">Are We Headed Toward a Bull or Bear Market?</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-one-mediocre-investor-prospered-after-the-market-crash">How One Mediocre Investor Prospered After the Market Crash</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment businesses consumerism djia dow jones industrial average Economy production rate of return s&p 500 stock market Wed, 07 Jun 2017 09:01:06 +0000 Dr Penny Pincher 1959368 at http://www.wisebread.com