Three Myths of Market Underperformance
Dan Richards*
February 10, 2009

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Stocks made no money from 1965 to1982

A recent Newsweek cover article claimed that the stock market was no higher in 1982 (the Dow ended 1981 at 875) than in 1965 (when it ended at 969).  When people make the case that the market can go sideways for long periods, this fact – and others like it – are their evidence.

On the face of it, it’s hard to argue with this assertion … unless we remember two critical points.

First, despite its prominence, the Dow Jones is only vaguely representative of the stock market as a whole.  Because it only contains 30 stocks and is price-weighted rather than capitalization-weighted (i.e., a stock trading at $50 has five times the weight of a stock trading at $10, regardless of their market capitalization), it doesn’t truly represent overall market performance.  In the 70’s in particular, the Dow Jones was laden with large household names referred to as “the nifty 50” that were chronic underperformers of the market as a whole.

Second – and more importantly – the overall price performance of this index ignores dividends, something that historically accounts for 40% of returns

From 1965 to 1982 the S&P 500, including dividends, had much better results:

Cumulative gain from Dec 31 1965 to Dec 31 1981:
Capital appreciation: 33%
Total return with dividends: 152%

The result is an annual return of 6% - well below the long run return on large U.S. stocks of 10% but still a very different proposition than being down over this period.

As an aside, people who use the period from the end of 1965 to 1981 are cherry picking one of the worst possible periods to make their case. Here’s the total return for two 16-year periods, starting one year earlier and one year later:

Dec 31 1964 to Dec 31 1980: 198%
Dec 31 1966 to Dec 31 1982:  240%

Focusing on just the price performance of an index and excluding dividends isn’t limited to the media – it’s a trap that many investment industry analysts and financial advisors fall into as well.

Advisors looking for this information can find it in the Ibbotson yearbook, available for purchase on Morningstar’s website.  It contains all the historical data you could want and makes for fascinating reading – a great value at $150 for advisors committed to professional advice.

Stocks took 25 years to recover to 1929 levels

A second common myth relates to how long it took for stocks to recover after the great crash.

Once again, if we look at just the price index, this is true.  Looking at year-end price levels, it took until 1952 to match the high hit by the S & P index at the end of 1928,  a disastrous experience for investors who held on through the great crash!

However, if we include dividends, we see a different story: at the end of 1952, the S & P was four and a half times the level of 1928, for an annual return of over 6% and a real return (after inflation) of 4% per year.

To counter arguments that distort reality, you need to have the real facts at your command.

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