Ignore Stock Market ‘Round Number’ Days

Posted on April 21, 2016 at 7:17 AM PST by

The Dow Jones Industrial Average just surpassed 18,000 points, overcoming a hurdle of sorts. The market hasn’t hit that specific round number since last summer.

There was no shortage of commentary on the Internet on the big 18K number. And why not? It’s interesting, and that’s what news organizations are about, filling up airtime and empty web pages with mildly interesting facts between bouts of actual news.

round number

 

Should you care? Absolutely not, for a number of reasons:

1. It’s a fallacy to attach importance to round numbers. The Year 2000 came and went and we all got worked up over a supposed global computer shutdown. Remember that?

2. We pass interesting milestones all the time. Dividend yields rise and fall. Inflation consumes more or less of our total return. There are a lot of moving parts here that aren’t being taking into account.

3. Did you feel any different at 30? How about turning 40 or 50? Neither does anybody else.

4. Most importantly, number watching tends to lead to market-timing trades. And those can be truly dangerous.

Do you know for a fact that passing 18,000 on the Dow means we’ll hit 19,000 by year end? You can probably find “evidence” to back up that assertion, if you look for it.

Do you know for fact that passing 18,000 — or 17,000, or any round number — means we’ll soon see a major collapse in stocks back to some previous low, or even lower? Look for it, and you’ll find evidence to support this viewpoint too.

And that’s the problem. Both the round-number optimists and round-number pessimists are guessing. Just guessing.

There is some data somewhere to show either and both outcomes are possible. But there is no data anywhere that proves either outcome is guaranteed.

But let’s step back and just think about optimists vs. pessimists. It’s contrarian to say this, but at least some investors should see rising stock prices as bad news.

Young people, for instance, need a stock market that is tethered to reality. If the price of “getting in” to the stock market goes too high, their risk of a lower long-term return goes up.

Round number reality

An older person, of course, wants stocks to rise and never return to earth. Irrationally high stock prices mean they are richer, at least on paper.

Stock markets are, as Warren Buffett often points out, a voting machine in the short term and a weighing machine in the long term. That is, prices can be wrong, even very wrong, for a while.

But in time they correct to a realistic level and then usually build higher from there. Does it matter that we must passed a round number with a lot of zeroes after it? For the retirement investor serious about building a portfolio, not at all.

What matters is owning stocks consistently, rebalancing periodically and adjusting that portfolio to avoid unnecessary risk as you get age. Round numbers in the stock market are a distraction, a passing headline — and nothing more.

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