The herd thunders on -- to Dow 20,000
(MoneyWatch) Now that the Dow Jones industrial average has cracked the 15,000 level, several experts are forecasting Dow 20,000, according to an article in The Wall Street Journal. That would equate to an additional 33 percent gain in the 30 stocks that compose this index.
Do such bullish predictions stoke your stock market fire? Do they stir up greed enough to compel you to capitalize on the spike, for fear you'll miss out? If so, you are not alone. These rosy predictions may make you think about throwing caution to the winds and going all in on the market. But consider this: I can predict with absolute certainty what the experts will predict, and they are sure to be wrong.
Take demographics expert Harry Dent as an example. In the bull markets before 2007, Dent predicted the Dow would hit 40,000. After the plunge, he changed his tune and predicted the Dow 3,800 in his best-selling book, "The Great Depression Ahead." Now, to my knowledge, Dent hasn't trotted out his Dow 40,000 promise a second time, but how long before he does so?
- The great depression ahead -- don't be so sure
- The Financial Media Hypothesis (FMH)
- Why I'm selling stocks
Experts tend to merely predict a continuation of the recent past. Think of it as the equivalent of a meteorologist predicting the weather by looking out the window. In good times, they will always predict more sunny skies. In bad times, they foresee more stormy weather. And since the financial experts currently look out their metaphorical window and see a soaring Dow, they say the index will continue to rise.
I also predict is that such an optimistic prediction will resonate with a hefty percentage of investors. We're in this to build wealth, right? How can we not act on this information that the pundits have so graciously shared with us? Maybe because doing so makes gives us entree to the latest, performance-chasing herd du jour. And regardless of which herd we find ourselves in, we'll still end up where all the herds do -- slaughtered.
At the risk of sounding like a fortune cookie, the statistics say that neither good times nor bad times will last forever, so it's critical that we don't invest like the experts. Predicting the future on the basis of the past will prove wrong in the long run. If the herd is headed in one direction, it's better to take the opposite road. Buy when markets are beat up and the herd predicts disaster, and sell when the markets boom and the herd predicts more of the same -- as it is now.
Personally, all this good times talk makes me nervous. And when that happens, I make it a point to rebalance my target allocation -- which, coincidentally, I've just done. You'll find there's a lot more room to maneuver when you don't go along with the herd.
Author's note: I apologize to any meteorologists I may have insulted and recognize your predictions are scientific. Unlike the experts, you are held accountable if you are wrong.