Jorgen Vik: A six-figure Dow? Time and math will tell

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Twenty-two years ago, James Glassman and Kevin Hassett presented their book, “Dow 36,000,” when the index had still not reached 10,000.

At this writing, the index is just hundreds away from their target.

In other words they weren’t wrong, they were just early.

I don’t care so much about picking their analysis apart. Even if they had said “36,000 in 20 years,” people would’ve thought they were nuts.

Which makes me wonder if I should write “Dow 140,000.”

It would seem crazy optimistic, wouldn’t it? Or maybe stupid.

But here’s the thing, if I suggested the Dow would go from 35,000 to 140,000 in 22 years, I’d predict about average returns.

That’s right. If you have 20 years to live I think, you’ll see the Dow hit six figures. If you have thirty years, I think you’ll see a quarter-million.

It all sounds outlandish because our brains can’t grasp compound math.

Let’s say the index doubles every decade — that’s about right historically.

Thirty-five thousand becomes 70,000 in 10 years. And 140,000 in another 10 years. Next, doubling takes the index to 280,000.

Some people’s brains freeze up when they see a lot of numbers and X’s and Y’s. I think everyone’s brain goes boink when they try to grasp compound math.

You can easily do the math for 7+7+7+7+7. It’s 35.

How about 7x7x7x7x7?

Safe to say it’s a lot more than 35. (It’s 16,807.)

So, where am I going with this?

When you invest for the long run, remember that returns compound over the years.

I think it’s incredibly likely stocks will beat the tar out of bonds and cash, the other traditional ingredients in a diversified portfolio.

Over the next 10 years, government bonds will pay interest of 1.3% per year and return the principal at the end.

The Dow Jones should pay slightly more in dividends, 1.5%.

But what if history repeats? You’d double your money, even if you spent the dividends.

No contest, stocks it is.

OK, I can hear it already. What about the volatility? And if I’m 70 years old, shouldn’t I reduce my stock exposure?

I don’t necessarily think so.

If you can ride out whatever crashes the market serves us over the next 10, 20, 30 years, what lifestyle and legacy difference could stocks bring to you, to your loved ones, and to the charities you cherish?

Think about it. Please.

Good luck.

Jorgen Vik is a certified financial planner and partner with SKV Group LLC.