Fact Check - Even THE WALL STREET JOURNAL Perpetuates Investing Myth

Last Updated Oct 20, 2009 11:36 AM EDT

I was notified by a financial planner of an article in The Wall Street Journal (online edition) that made the following claim:
If you invested $100 in the S&P 500 at the end of the last decade, you're happy with Dow 10000 but still hoping for a 34.5% rally before year end -- just to break even.
This planner was touting how good his products were by comparison.

The article entitled "The Lost Decade of Stock Investing," appeared on October 15, and noted "Advisers sold us a bill of goods about the lasting value of real estate and stocks." I tend to agree with the author, David Weidner, that we advisers did understate the risks of stock market investing, yet the 34.5 percent figure startled me and didn't seem accurate.

Notice that Weidner didn't say the S&P 500 lost 34.5%; he stated it needed this rally to just to break even. If the S&P 500 had lost 25.7 percent, it would need a 34.5 percent rally to break even. But did the S&P 500 lose 25.7 percent this decade through October 15?

I calculated the loss of an investment in the Vanguard S&P 500 index fund (VFINX) and came up with only a 12.5 percent loss. A 12.5 percent loss would equate to a 14.3 percent rally needed to break even. It appears that Mr. Weidner's claim was a tad exaggerated, actually quite a bit more than a tad. I suspect that he framed his stats in a manner that I've seen all too often, which is using the S&P 500 index itself, and not including the portion of the S&P 500 investment return that comes from dividends. Over a long period of time, compounded dividends account for most of the return.

The same financial planners that Weidner notes "sold us a bill of goods," loved his column. A planner that only lost 20 percent during that decade could claim he was skilled and beat the market, even though he lagged the true S&P 500 return of a 12.5 percent loss.

I did contact Weidner who replied that his math was correct. I wrote him that I wasn't questioning the math, I was questioning the accuracy of his statement. Not to mention that he was giving my industry more ammunition to perpetuate the myth that the S&P 500 index, stripped of dividends, is the market. Doing so allows us to sell consumers an even bigger bill of goods.

I then called Weidner and discussed the matter with him. He seemed to grasp my point that the S&P 500 Index is stripped of dividends and not equal to an investment in the S&P 500. Though we had a very good conversation, no correction will be appearing.

My point
My point isn't to pick on THE WALL STREET JOURNAL. I've been reading it for three decades and my mornings wouldn't be the same without it. Nor is it to pick on Mr. Weidner, whose main point about advisers is something I agree with.

My point is that the financial industry loves to set the S&P 500 Index as a bogie for the stock market. Not only is it not the entire stock market (it represents roughly 80 percent of the US stock market and 38 percent of the global market), it's only part of the return of part of the stock market. These comparisons are less like comparing apples to oranges, and more like comparing apples to parts of oranges.

So the next time you hear someone quoting the return of the S&P 500, make sure of two things:
  • Does it include the entire return or are dividends stripped out?
  • Are they comparing this return to a portfolio that only includes large cap U.S. stocks?
Improper comparisons are not only costly, but also pave the way for advisers to sell you yet another bill of goods.

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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