Dow 1,000,000?

A few weeks ago, Warren Buffet predicted that the Dow Jones Industrial Average would rise to over 1,000,000 within the next 100 years. (The Dow Jones index closed around 22,300 earlier this past week.) In other words, according to Buffet if you invest $22,300 into the index today it will eventually grow to be worth more than $1,000,000.

This may seem like astronomical growth but it’s actually not. The index would only need to grow by an average rate of 3.87% per year for the next century. This simply illustrates the power of compounding interest. Yes, your $22,300 could grow to more than $1,000,000 quite easily. In fact, had you invested $22,300 in the Dow Jones index 100 years ago, it would be worth well more than $5,000,000 today.*

This is the reason why investing in the stock market is viewed as one of the essential tools for growing one’s wealth.

The main problem with this notion is that almost no one has a 100-year investment time horizon, although we would all likely be much more successful investors if we did. Many investors have a relatively shorter investment time horizon. Some have only a few years or even less. For those investors stocks may not be appropriate because if they are going to need to spend all or part of their investments to satisfy current financial obligations because they won’t have sufficient time to recover from the next inevitable unpredictable major market correction.

Also, even for those investors with a longer time horizon, many lack discipline to stay invested when times get turbulent. Studies show that the average investor substantially underperforms the major stock indexes because they tend to sell after market corrections and buy once stocks have already gone up. So even if Buffet’s prediction turns out to be correct, the average investor probably won’t get nearly the full benefit. *Barrons