When we think about American investors as a whole, we tend to think of them, probably correctly, as not the financially savviest folks around. After all, many of them think that stock splits are very meaningful events, and many of them couldn't really tell you what a P/E ratio is or how to use it. We probably also assume that the average investor has higher expectations of the stock market than he or she should. That's often been the case, with some people expecting the market to give them 25% growth each year, even though the historical average rate is around 10%.
At the crossingwallstreet.com site, though, I recently noted something interesting. As Eddy Elfenbein reported, "Last year, Business Week asked its readers to vote on where the Dow would be at the end of 2006." He then cited the results:
| Level | Percentage |
|---|---|
| 10,000 or Below | 15.1% |
| Around 10,500 | 13.1% |
| Around 11,000 | 24.3% |
| Around 11,500 | 28.3% |
| 12,000 or Higher | 15.8% |
| Not Sure | 3.4% |
Now, to me, the correct response would be "not sure," since none of us can really know where the market will go over any relatively short period, such as a year. But the question was really just asking for a guess, and still, as Elfenbein noted, the results were surprising, with some 81% of respondents thinking the Dow would be lower than where it is today (up about 16% year to date, as of late December).
Why all of the pessimism? Well, to some degree, it wasn't really pessimism. The Dow ended 2005 at 10,718, so a full two-thirds of respondents expected some kind of increase from that point. It's just that many of these folks didn't expect all that much of a rise. That may be because it rose only a little, if at all, over the past few years, and it actually lost value in the early years of this decade.
The pros aren't omniscient
Interestingly, as Elfenbein noted, "The professionals were even gloomier. Here were the predictions of 76 market pros. The Dow is currently higher than all but three of their forecasts." He added that "the latest Barron's roundup of market pros sees the Dow headed to 13,220. That's only 6% from where we are now."
What to do
So what should you do with this knowledge? Well, for starters, don't attribute that much meaning to the Dow Jones Industrial Average -- which just measures the performance of 30 companies, including Boeing
Beyond that, know that any kind of prediction about where the stock market is headed in the near future should be taken with a grain of salt. Sure, some of today's stock-market prognosticators will get it right -- but they probably won't do so tomorrow, or consistently. Focus on the long term, knowing that the market's average annual return has been around 10% over long periods -- but even then, remember that over your particular long-term period, it could average 8% or 12% or, most likely, something else.
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Selena Maranjian 's favorite discussion boards include Book Club , Eclectic Library , and Card & Board Games . She owns shares of 3M, which is an Inside Value recommendation. For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens. The Motley Fool isFools writing for Fools.
