Will the Dow Jones Industrial Average (DJI) reach 20,000 in 2015? An economics professor from Wharton School of Finance [Jeremy Siegel] was recently interviewed on CNBC.com and believes the Dow could get to 20,000 should the US economy grow by three or four percent this year. Siegel also believes the market is under-valued and markets usually go beyond fair market value before retracting. For the Dow to reach 20,000, a few things may need to happen. Most notably: no inflation. Other factors include: low interest rates, low unemployment, low oil and gas prices and finally no supply constraints.
At CFE Finances, we believe it would be great to see the Dow reach 20,000 this year. It is a great reason for all the do-it-yourself investors to stay invested. We need to keep doing our research, invest regularly, and we will all benefit if the Dow reaches 20,000. Another reason why the Dow could reach 20,000 is that over the last several years, companies have been buying back their company stock, which has lowered the amount of shares available to buy. This makes company shares more valuable because there are fewer shares to buy. Today most people in the US are saving in a 401k, 403b, IRA or Roth account for retirement. Many of these retirement funds are managed by fund managers who purchase company stocks in large quantities which helps drive the stock prices up. This should continue in 2015 and could help our theory of the Dow reaching 20,000.
The average price to earnings ratio (PE Ratio) in today’s market is 17.5 which is lower than the price to earnings ratio of 30 seen in the late 90’s bull market or the dot com era. As investors, we want to purchase stocks below its 5 years average PE ratio. We realize it’s hard to find good companies in today’s market with a price to earnings multiple below its 5 year average. That’s why we say you need to be a patient investor and if you are, you will take out most of the risk in investing in stocks. The old saying buy low, sell high should always be in the back of your mind.
The Dow today as I write this newsletter is trading above 18,000 which may seem high and might be at a point of a correction. We all need to realize corrections are sometimes beneficial because it’s healthy for the market and gives us an opportunity to purchase good company stocks when the market declines. Long time investor, Warren Buffet’s right hand man at Berkshire Hathaway (BRK-A) Charlie Munger, says you need to be a patient investor when buying stocks. Mr. Munger has an estimated net worth of $1.3 billion.
Another important point to remember or a friendly reminder to consider, when adding stocks to your stock portfolio and reducing the risk of loss, make sure you keep in mind to diversify your stocks selections. In addition, keep in mind, many of the US equity are at all-time highs, so as individual investors, we all need to do our homework before purchasing any stocks.
Good luck and happy investing from CFE finances, we will be in touch with another newsletter soon. If you have any questions or concerns, please email us from our contact page.