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Now that the DJIA has reached 20,000, is it still a good idea to invest in the market?

I'm 34 years old and will soon be receiving my bonus. I would like to invest in the market, preferably in an asset with a high potential for growth. However, I am a little pessimistic due to the fact that the market has rallied since 2009. Is there potential for capital appreciation, despite the record setting highs of today's market?

Career / Compensation, Investing
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January 2017

Great question. The 20,000 mark on the Dow is of no great significance despite occasional comments from folks who maintain that there's something magical about it. Far more important is the level of valuation, which is the relationship between the level of the Dow and its underlying earnings. The valuation is also known as the price-earnings multiple.

On average over time, normal valuations for the key indexes such as the Dow range from the mid to upper teens. Valuations tend to be higher when prevailing interest rates are low (as they are now) and when the pace of corporate earnings is accelerating.

At the moment, the valuation of the Dow is about 18 times estimated earnings for the current year, which is a bit rich, but not excessively so. As long as rates stay reasonably low and corporate earnings accelerate, the current valuation seems sustainable.

Your concern is about the potential for growth. Given your time horizon, which is probably five decades long, I think your focus needs to be long term. With a time horizon of 20 years or more, there's every reason to concentrate your investments in equities, which have always outperformed other asset classes over periods of 20 years or more. Still, you will need to be aware that equities are more volatile than other asset classes and pullbacks of 10% or so during most years are to be expected. Even with those pullbacks, the full-year results are usually gains.

So the potential for growth is available. You would be well advised to stick to equities, evenly divided between domestic and international issues. Vanguard has low-cost total market index funds for both that you should consider. Good luck!

January 2017
January 2017
January 2017
January 2017