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No fewer than five high-profile news stories have described the plight of the individual investor in the last month. All cite some variation of how poor the stock market has performed in recent years -- and the last decade -- as explanations for investors losing hope.
Here's how Andrew Ross Sorkin of The New York Times describes the investment climate: "Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation of investors hasn't made a buck."
Really? Because here's what the Dow has done in the last 12 years using March 2000 -- the peak of the stock bubble -- as a starting point:
Source: S&P Capital IQ.
If "an entire generation of investors hasn't made a buck" in the market, that's their fault. Someone who bought an index fund on the very day the dot-com bubble peaked and held through today has earned more than 60% on their investment. These results are not great, mind you -- they're downright poor -- but never before have market returns been denied by so many.
Why the schism between perception and reality? One reason is dividends. Citing the raw value of a stock index is easy. Adjusting it to include dividends takes some elbow grease and an Excel spreadsheet. In my experience, dividends are ignored nine times out of 10 when historic market returns are cited. And the longer the period cited, the sillier the omission becomes. While the market was "flat" from 2000 to 2010, S&P 500 companies paid out more than $2 trillion in dividends. Since 1871, the S&P 500 (as recreated by Yale economist Robert Shiller) has gone from 4.5 points to 1,420. But add in dividends, and the index actually jumped from 4.5 to -- I'm not making this up -- 741,977. People would think you're insane for citing bond returns while leaving out interest payments, but they do the equivalent all the time with stocks. And that actually understates the insanity -- the dividend yield on stocks now far exceeds the yield on Treasury bonds.
Really smart analysts fall for this sometimes. Eddy Elfenbein -- one of the best business writers out there and an analyst I admire -- pointed out earlier this week that the Dow went nowhere from 1912 to 1942. "That's right, thirty years later," he wrote. He concedes that "dividends, of course, helped out a lot," but doesn't say how much. Using the recreated S&P 500 (where there's better historic data) shows that, indeed, stocks went nowhere from 1912 to 1948. But add in dividends and the index actually increased fivefold. Even in real (inflation-adjusted) terms, investors nearly tripled their money.
There is a deeper issue here, and that's the idea that "investors are fleeing the markets like never before," as Sorkin quotes in his article. This is a common storyline these days. Almost without exception, the evidence to back it up rests on investors pulling money out of mutual funds. Sorkin writes:
Here are the numbers today: About $171 billion has flowed out of mutual funds over the last year, according to the Investment Company Institute, which tracks mutual fund data. Where has all that money gone?
But that's only part of the story. A lot of money is flowing out of stock mutual funds and into stock ETFs, where fees are usually lower.
Yes, Investment Company Institute data show $196 billion has been withdrawn from stock mutual funds since 2009. But according to the ETF Industry Association, $212.4 billion was added to stock ETFs during that time. Year to date, $30 billion has been pulled out of stock mutual funds, but $34 billion has been added (link opens PDF) to stock ETFs. Including ETFs isn't just an offset to the "investors-are-fleeing" narrative; it changes the story entirely.
Some things can be factually true but incomplete. We've been seeing a lot of that lately.