On Friday morning I turned on my computer and pulled up CNBC only to see a headline that read Dow 900,000? I almost spit my coffee out laughing and then naturally, clicked on the link.
Investor Ron Baron, that morning, had said that the Dow will reach 900,000 over the next 50 years because of faster growth. A multitude of things ran through my mind as I processed this assertion:
- 50 years is a long time and I’m not sure how relevant this is for non-institutional investors.
- What are his growth rate assumptions?
- Why is this even grabbing my attention?
For background and context, Ron Baron is the founder of Baron Capital and per the Baron Funds website began managing client assets in 1975 and formed Baron Capital, Inc. & Baron Capital Management in 1982. To say that he has seen a lot in his career would be an understatement. I must also say that in my 19+ years in the industry, every time I have seen him interviewed, he is positive and very focused on the long-term. But he must be. He is a growth investor who generally holds concentrated portfolios. One of his top funds had over 42% of its assets in one stock as of March 31, 2023, according to YCharts.com.
Now to be clear, I am not criticizing the famed investor. I hold him in high regard and always enjoy listening to him when he speaks. My point is that when you run growth funds with concentrated positions that normally correct more than the broad market when stocks go down, you must think about things over a very long-time horizon. These stock funds seek higher long-term returns as a reward for the extra risk.
So, to my first thought, this “news” is not relevant to anyone in or nearing retirement. But for a 20-year-old starting to invest in a 401(k), it is critical to remember that saving for retirement is a marathon and you are going to go through many bear markets and uncomfortable periods. Keep buying and let dollar-cost-averaging work for you. Assuming that you are properly diversified, the dips are opportunities to buy things on sale. Now for a retiree, it is the opposite. If you have not planned properly to manage your distributions, the dips may force you to sell when things are on sale.
My second thought went to math. So, I pulled up Microsoft Excel and did the calculation. Using 34,000 as the approximate level of the Dow today, a future value of 900,000, and 50 years to compound, the rate ended up being 6.77%. I was surprised it was so low. But it goes to show the power of compounding. At a return of 6.77%, $10,000 grows to almost $265,000 in 50 years. But there is one more thing… this doesn’t include dividends. Assuming about 2% of dividends reinvested and that $10,000 is now almost $670,000 in 50 years.
Lastly, just like almost everything in the financial media, it is being put out there to drive clicks and advertising dollars, not to help us. Everything must be sensationalized to grab our attention for those brief but precious minutes or seconds because our attention has value. It leads to more clicks, which leads to more cookies on our internet browsers, which leads to more targeted advertising, which leads to more clicks, and eventually a subscription to a worthless newsletter or a purchase of something we really don’t need.
So, whether Ron Baron is right, and the Dow does reach 900,000 in 50 years (which he won’t be around to find out) is irrelevant. The point of the article was to grab our attention. As we consume financial media, we are always presented with ways to get rich quick, or the next stock that is going to change the world, or a better way to invest, or the impending doom upon us. The reality is that everyone has an angle and is trying to sell us something. Their “advice” or “recommendations” do not consider our unique risk tolerances, behavioral tendencies, or financial situations.
So, remember, as you consume financial media; take it with a grain of salt and if it makes you feel like you are missing out on something, call your financial advisor. They will gladly vet it and take you back through your financial plan. Your financial plan provides a framework to evaluate new investment ideas and opportunities. It is not set in stone and should reasonably and responsibly adapt to the changes in your life and the markets.