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Forget the Dow under 10,000. These Numbers Really Count

Do you find yourself a bit depressed now that the Dow has slipped under 10,000 again? I have to confess that it makes me mildly anxious, even though I know that the five-figure mark means nothing. That happens to be the mirror image of a point I made in a post a few months back, when the Dow passed through 10,000 going the other way. The prevailing emotion then was euphoria; now it's worry. But now, as then, it was important to get a grip on what really is important.

So by way of putting the five-figure milestone in perspective, let's note some other numbers that matter a lot more to you and your future.

52 That's the percentage return of the Dow since it hit its low in March. After that kind of run, stocks were due for a breather. What did you expect?

-1.5% The return you earn on three year Treasury notes after inflation at today's 2.7% annual rate. In other words, there's good reason to absorb some risk in stocks right now because hiding out in safe investments, particularly bonds, doesn't pay.

50 Percent of time that the tiny nation of Greece has been in default or restructuring since World War II. The debt woes in that country have been blamed for the stock market's recent malaise, but debt woes are a way of life there, and we've always survived.

$1.6 trillion The size of the federal deficit, the highest it's been as a percentage of GDP since World War II ended. That means that Congress either has to bring taxes in line with spending-or let inflation run rampant and pay off the debt in devalued. It's not a pretty prospect, but stocks are a better inflation hedge than bonds.

2020 What your calendar will say 10 years from now. You need to be more concerned about where the Dow (and you) will be at that time-and 10 years beyond that-than whether the Dow is above or below its Mendoza line right now.

So what do these numbers tell you?

  • The risk in the short run is default and deflation; in the long run it's inflation. You won't be able to time the switch, so hedge yourself against both risks. You need to have some of your money in high-quality bonds--that's the deflation hedge. But you also can't abandon stocks, which are a far better inflation hedge than bonds. And make sure you have some of that equity holding in international mutual funds (your hedge against the cheapening of the dollar).
  • Focus on the future. The Dow's fall through 10,000-one of 57 times it's crossed the milestone going one direction or the other-may be sobering, but it tells you nothing about what you really need to know, which is what's going to happen next. I know you've heard it before, but your best protection is an asset allocation you can stick with for the long run, come what may. Those words were true when the Dow was climbing up through 10,000. It's just as true now.
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