The Arbor Outlook: Record Dow, Asset Allocation and Complication

“I’d be safe and warm… if I was in L.A… California dreamin’… on such a winter’s day.”
— from “California Dreamin’” as recorded by The Mamas and The Papas

The storyline of "It’s Complicated" is only mildly entertaining, but I’ve watched it repeatedly because the architecture and scenery are so exquisite. The quality of light on the California coast and the interior home design in Santa Barbara are extraordinarily pleasing.

Where are we going with this? Well, the Dow Jones Industrial Average (DJIA) recently surpassed 20,000 for the first time in its history, an all-time high. Most folks intuitively think their portfolio’s progress should march in tandem with the DJIA. Should it? Well, like the movie title says, it’s complicated.

Invented by Charles Dow in 1896, the index originally contained only 12 primarily industrial companies that represented different market sectors. Instead of asking the hard-to-answer question of “How did American industry perform today?” folks just started inquiring as to how “the Dow” did. Back then, America’s economy was mainly agricultural and industrial, and the DJIA performance accurately approximated the fortunes of American industry through those dozen businesses.

Today the Dow contains 30 stocks and includes companies that produce everything from jet engines to iPhones. Ironically, although the DJIA contains more than twice the number of companies than it originally did, many professional investors actually believe the DJIA is less representative of American industry than it was in the late 1800s.

The American economy, and American economic dynamism, simply can’t be assessed through the daily movement of 30 massive businesses. Public companies are only a tiny fraction of the total number of businesses in the U.S., and those same publicly traded companies represent only a third of non-farm employment. So an even smaller subset of those publicly traded companies (the DJIA), massive as those businesses may be, doesn’t accurately represent American economic progress.

But even if the present-day DJIA did represent the collective fortunes of American business, most soon-to-be-retired or retired investors don’t want all the ups and downs of being 100 percent invested only in the Dow. American businesses, even though they’re among the most profitable and resilient in the world, often encounter their share of turbulence. It’s the nature of markets.

Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.