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Stocks at All-Time Highs; Investors Apparently Burned

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See if this makes sense.

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.

What else happened in the last month? Both the Dow Jones (INDEX: ^DJI  ) and S&P 500 (INDEX: ^GSPC  ) hit all-time highs when adjusted for dividends.

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.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (25) | Recommend This Article (69)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 22, 2012, at 7:10 PM, TMFDarwood11 wrote:

    I have no idea of where Eddy Elfenbein is coming from. However, when i see an article with specific data points, such as "1912 to 1942" I become suspicious. I become more suspicious when such items as inflation and dividends are ignored.

    I did read Elfenbein's post and he said "what I find most interesting, and most frightening, is a fact that all investors need to understand: The Dow didn’t finally shake its 1912 high until 1942. That’s right, thirty years later. On April 28, 1942, the Dow bottomed out at 92.92."

    I could also say "so what?" I mean, I do study the past but darn, picking stripped down data during a 30 year period that ended 70 years ago as a point for a broad warning about the stock market AND ignoring dividends! Why dang!

    What Elfenbein conveniently ignored was the return of stocks for that period with dividends reinvested and accounting for inflation.

    That's a realistic approach to what some of us who are attempting to build a retirement nest egg are attempting to do.

    And guess what? The data indicates that stocks did very well over that period. Today, even the total stock market ETF VTI provides a yield of 1.8%!

    But I guess Elfenbein is attempting to steer us away from stocks, and into something else. What? Gold, bonds? Gasp! If bonds, then possibly into the jaws of the next bubble.

    When it comes to "bubbles" I have come to view some analysts as the enemy to my financial well being.

    As far as I'm concerned, we might just as well use the factors contributing to the "dust bowl" as the argument for this years excessive temperatures in the midwest.

    I think there may also be a deeper story here, and it is simply that some analysts and writers are simply "telling people what they want to hear."

  • Report this Comment On August 22, 2012, at 7:19 PM, HighVoltage627 wrote:

    Once again, excellent article Morgan.

    I've been suspecting for a while that "mutual fund" withdrawls weren't tell telling the whole story. I figured people were either doing their investing themselves, or switching to ETF's.

    A more truthfull headline would be "Investors finally figure out money manages arent worth anything."

  • Report this Comment On August 22, 2012, at 8:10 PM, Borbality wrote:

    Great stuff. Also have to assume a lot of mutual funds are being sold as part of 401k plans following layoffs over the last few years.

  • Report this Comment On August 22, 2012, at 10:16 PM, DividendsBoom wrote:

    I think kahuna, really likes kahuna.

  • Report this Comment On August 22, 2012, at 10:54 PM, MASTERHF wrote:

    The facts reported only make me think that stock market still have room to continue it bull market. Because only when we have all people buying stocks it time to sell.

    On the other hand the fed minutes that were revealed today appoint to a QE3 that should contribute to the upside too.

    Finally, there are some stocks like Coca-Cola and Wal-Mart that are very cheap (see ).

  • Report this Comment On August 22, 2012, at 11:54 PM, gcp3rd wrote:

    Morgan thanks for pointing this out. In the myriad of semi-useful info I scroll across daily I have read the very same statement that X number of dollars have been withdrawn from mutual funds. That's a pointless and worthless statement once you know the same dollars have gone in to ETFs. It's just a shift in investor format or preference.

    I was just reading today in the Intelligent Investor about Buffet's preference for index funds (newer edition with updated comments). I am almost to the point where I will just put all stock mutual fund money (ie outside of bonds and specific shares) into index funds. There are so many arguments for it.

  • Report this Comment On August 23, 2012, at 7:13 AM, PerpetualSteve wrote:

    Investors burned? Puhleeze.

    Perhaps fools.

    Day traders and Investment firms that cant hold a failing, but recoverable stock for 1 year should have a 1 FOOL rating.

    I have yet to buy a stock that hasn`t eventually recovered, unless it disappeared completely.


  • Report this Comment On August 23, 2012, at 8:50 AM, turtle975 wrote:

    I'm not entirely pleased with the history of managed mutual funds - so I did indeed get out of them over the past few years. But I stayed invested - that money is still invested in stocks - just not in mutual funds. From this article, that may be the case for lots of folks. Looks like more bad news for fund managers than anyone else.

  • Report this Comment On August 23, 2012, at 9:52 AM, ClimbinFool wrote:


    Quick question. Are the additional returns you cite from straight-up dividends or does it assume reinvested dividends?

  • Report this Comment On August 23, 2012, at 10:01 AM, TMFMorgan wrote:

    ^ Reinvested. Before someone claims that's not fair, I'll point out that it's no different than assuming capital gains are left invested each year instead of being sold and withdrawn.

  • Report this Comment On August 23, 2012, at 11:03 AM, mckenzi4 wrote:


  • Report this Comment On August 23, 2012, at 11:11 AM, TMFMorgan wrote:

    ^Thanks. We'll get it fixed. PFD is actually "personal flotation device," which are hard to open with hyperlinks.

  • Report this Comment On August 23, 2012, at 11:18 AM, Johny205 wrote:

    I have some money in an employer matched 401K. I just started at my current job about a year ago and my 401K is down about 5%. I just started investing in the stock market about 1 and a half months ago and I am up 17%. By doing a little bit of research into companies and reading articals from Motley Fool I decided to buy APPL, DDD, and CRUS. If someone like me can be way more profitable than a John Hancock stock index thats pretty sad. How is it that the market is up from a year ago but yet their down 5%? I think by doing some due dilligance your average Joe can do just as well as any of these mutual funds.

  • Report this Comment On August 23, 2012, at 1:26 PM, jpanspac wrote:

    Who cares about the Dow? Please stick to S&P 500 for future articles.

  • Report this Comment On August 23, 2012, at 8:29 PM, colleran wrote:

    Jeez Morgan. Don't confuse us with the facts!

  • Report this Comment On August 24, 2012, at 11:41 AM, PianoguyScott wrote:

    Thanks - again - for the incredibly lucid commentary. I hate to sound like a brwon-nose, but your articles are SO enlightening. This one included ...

  • Report this Comment On August 24, 2012, at 12:27 PM, TMFMorgan wrote:

    ^ Thanks!

  • Report this Comment On August 24, 2012, at 1:59 PM, tom2727 wrote:

    Journalists don't get paid for being sensible. They get paid when people read their stuff.

    The "sky is falling" type articles get readers. The "here's the real facts, and it's complicated" articles don't. Kind of like the "Price Harry's naked" and "Snookie's pregnant" articles get readers.

    Financial journalists are no different from TMZ in this regard. Try writing a "hang the banksters" article and a "real reform needed for wall street" article and see which gets read.

  • Report this Comment On August 24, 2012, at 2:19 PM, TMFMorgan wrote:

    ^ Well said.

  • Report this Comment On August 24, 2012, at 2:20 PM, DebtFreeDave0 wrote:

    This article makes a great point. I've often wondered how my stocks are doing relative to the S&P 500 when taking dividends into account. I've never really tracked it though, because I track my stocks using The Motley Fool's My Scorecard, which ignores dividends. Any plans to update My Scorecard so dividends are taken into account?

  • Report this Comment On August 24, 2012, at 2:24 PM, Hestheone wrote:

    Meh. I still see no reason to be excited about market performance, and even with equities being at an all time high, the return for the past 12 years on the chart is not very good at all. Adjusting for real inflation leaves you about as well off as if you had put the money in a mason jar buried in the back yard.

  • Report this Comment On August 25, 2012, at 2:57 AM, daleinaz wrote:

    @hestheone, cash in a jar does not get adjusted for inflation at all. It would still be at ~80. Yes, if you bought into the market at *the very height of the bubble* you would only have a 60% gain 12 years later. That's hardly "not making a buck", and, I think, net positive after inflation. Had you bought in a year or two earlier, you'd be much better off.

  • Report this Comment On August 26, 2012, at 2:35 PM, mostlygreen wrote:

    You hit on one of my pet peeves--not considering dividends when looking at an index' performance. What's worse is that it is not a trivial matter to determine that the index's don't include reinvested dividends. I had to research this myself. SP500 was straightforward. DJIA was another story. There is contracdictory discussion on the net due to the divisor calculations. I finally determined that dividends are NOT included in DJIA by comparing the DJIA to a DOW index ETF in terms of long term performance.

  • Report this Comment On September 02, 2012, at 10:33 PM, beachbum242 wrote:

    When I along with alot of other investors see Obama has more than a 50/50 chance of being reelected. I'm cashing all my investments. Most of the folks voting for Obama are looking for a free ride at the expence of the wealthy. Its going to be pitiful when the truth hits the squarely in the face. Maybe folks like Oprah and most of Hollywood will have jobs for everyone.

  • Report this Comment On September 03, 2012, at 12:47 AM, lngtrmcptlgns wrote:

    Another great article. Thank you so much Morgan for shining a light.

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