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Revisiting "Dow 36,000"

SMI publisher Austin Pryor's editorial in the current Sound Mind Investing newsletter notes that our human "ignorance of the future is staggering." Even the smartest of the "experts" can't know for sure what is going to happen.

James K. Glassman, co-author a dozen years ago of the bestseller Dow 36,000, conceded as much (subscribers' link) in a column last week in the Wall Street Journal.

In 1999, I co-authored a book called Dow 36,000 that became, in some circles, a notorious symbol for bullishness about the stock market. While the book had a provocative title, its fundamental message was mainstream: Long-term investors should load up on U.S. stocks....

Today, the Dow Jones Industrial Average is just 20% higher than it was when Dow 36,000 was published in September 1999 and the markets stood at 10,318....

What happened? The world changed....

The first major change is that the relative economic standing of the U.S. is declining. The Congressional Budget Office estimates that U.S. growth will average a little more than 2% over the next 70 years, compared to about 3.5% during the second half of the 20th century. This is a stunning decline....

The second big change involves risk. Along with most investment analysts, I used to consider only one kind of risk: the volatility of an asset's price. While stocks have returned a yearly average of about 10%, their actual returns bounce around from year to year. [See SMI executive editor Mark Biller's recent post on this.]....

But there is a second kind of risk, the kind that we can't really measure or expect — the murder of 3,000 Americans by terrorists in a single day, the Dow losing 1,000 points within minutes in a "flash crash," or home values in the U.S. suddenly plummeting. These discontinuous risks — or "uncertainties," as the famous University of Chicago economist Frank Knight called them — are multiplying in a world in which technology provides instantaneous connections among markets and allows just about anyone to do just about anything, anywhere....

In theory, historical averages show that stocks are a good buy if you can hang on through the miserable periods. But most investors find that excruciatingly difficult to do — a fact that I never fully appreciated in my 30 years of writing about investing.

Fear, or simply a need for cash, triumphs, and people sell before stocks bounce back. I've gotten tired of telling investors to buckle up and hang on. Instead, I am urging them to adopt a more cautious strategy than the conventional financial wisdom — or Dow 36,000 — would dictate.

Glassman is making a concession to human nature. In other words, he is acknowledging that the long-term investment approach that may make the most sense mathematically doesn't always work in the crucible of daily life and human decision-making.

Austin touched on this same topic in his November editorial, and he laid out an alternate strategy for investors feeling particularly nerve-wracked by the events of the past three years:

For those investors, it's better to have a less than optimum stock/bond allocation that they can stay with long term than an allocation suggested by our "seasons of life" approach that they can't tolerate and stick with during down markets.

The specifics are here.

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