31
JAN

Dow Cracks 20,000, But Does It Matter for Most of Us?

Written by Beau Noeske

The DJIA broke past the 20,000 threshold for the first time in history on January 25, 2017. While 20,000 is somewhat of an arbitrary value, the enthusiasm surrounding it may have more to do with psychology than fundamentals.

According to Dr. Art Markman of Psychology Today, while the construct of integers should be unbiased in a perfect world where each has equal significance with regard to precision, people in the real world ascribe greater value to round numbers—those tending to end in 0 or 5—because those values are easier to remember than other values even if they are less precise. Similarly, milestones tend to be marked with round values as well. Say that you’ve been married for more than two decades; are you more likely to remember your 19th anniversary or your 20th? According to a paper by Sharon Armstrong, Lila Gleitman, and Henry Gleitman, dating back to 1983, people recognize round numbers more quickly and generally perceive them as “better” than other numbers.[1]

Likewise, a study originally published in 2013 by Booz & Company demonstrated that despite $0.99 pricing (a pricing structure dating back to Biblical times in society), in a sample of app downloads, restaurant receipts, and self-pumped gasoline purchases, 57–73% of customers preferred to pay a value ending in $0.00 or $0.50.[2]

The stock market has proven to be no different. According to a CNBC study, over the past 30 years when the Dow has broken a new thousand-level threshold all the way from 2,000 up through 19,000 in November 2016, the market pricing momentum tends to persist because the “000” multiples garner media attention and more investors jump on the bandwagon. Furthermore, traders tend to push it up even higher and this effect can last for a month or even a quarter.[3]

While trends and numbers such as these cause a fair amount of consternation and fervor within our industry bubble, perhaps most striking is that, according to a 2015 Bankrate survey, 54% of Americans had exactly $0 invested in the market. That figure includes stocks, bonds, mutual funds, and ETFs and spans brokerage and retirement accounts.

However, that perhaps brings greater emphasis on the fact that those of us who participate in the market are likely the ones driving and perpetuating this nonsensical round number fervor, as opposed to an individual who keeps his or her savings under the mattress. It is FDx Advisors’ opinion that rather than chasing or overanalyzing these artificial milestones, investors would be better suited to position themselves for long-term success by selecting an appropriate allocation of investment strategies focused upon the underlying fundamentals. After all, the true present value of any asset is equal to the sum of its discounted future cash flows, regardless of the ending integer.

[1] https://www.psychologytoday.com/blog/ulterior-motives/201006/anniversaries-milestones-categories-and-round-numbers
[2] http://www.strategy-business.com/blog/The-Psychology-of-Pricing-Customers-Prefer-Round-Numbers?gko=f4877
[3] http://finance.yahoo.com/news/dow-crosses-thousand-multiple-heres-154740489.html

Please Note: Content Limitations: The above content is a general discussion only, and should not be construed as a substitute for the receipt of specific advice or counsel from Folio Dynamics (dba FolioDynamix) or the professional advisors of the reader’s choosing relative to a reader’s specific situation or circumstances. To the extent that the above references any general investment-related issues, please remember that different types of investments and/or investment strategies involve varying levels of risk, and there can never be any assurance that any specific investment or investment strategy will be either suitable or profitable.

This blog post was written by Beau Noeske, CFA, Senior Investment Research Analyst for FDx Advisors.