The US stock market and total returns
The US stock market is made up of thousands of stocks and best measured using the total return of the Wilshire 5000. The largest 500 companies comprise an index known as the S&P 500, which represents roughly 75 percent of the total value of the US stock market. The returns from both the total stock market and the S&P 500 come from a combination of market appreciation and dividends.
From the above, we can get three different calculations for 2010 returns using data through the first 51 weeks of the year
Thus, we can see that the US stock market delivered total returns of 17.76 percent while the pure S&P 500 index only delivered 5.22 percentage points less. That's because small and mid cap stocks had a much better year than large cap, and because dividends are part of an investor's return. Yet, the AP regularly quotes this stripped down number.
AP headline: Index investing beats the stock market
Though this isn't (yet) an actual headline, considering the Vanguard Total US Stock Market Index Fund (VTI) returned 16.64 percent and beat the S&P 500 index by 4.10 percentage points, the AP logic would conclude that the total stock market fund beats the market. Not to mince words here, that's an idiotic conclusion to arrive at, since owning the whole market can't beat the market.
Why Wall Street loves the AP
No surprise that the investment industry doesn't join me in thinking such conclusions are idiotic. They love the AP practice. Probably because it allows them to claim a 14.0 percent return on their active portfolio actually beat the market, using the AP definition of the market when, in reality, they underperformed the US stock market by 3.76 percentage points. The money managers can point to a non-existent skill to mislead consumers to continue to pay expensive fees to outsmart the market. A beautiful illusion for Wall Street that even David Copperfield might be envious of, and a win-win for everybody but the investor.
Why the AP creates this illusion
Year after year, I've pointed out the logic flaw, as well as why this hurts consumers, to the AP. And yet, last year they gave the mother of all Christmas presents to Wall Street by compounding the error for ten years, reporting that the S&P lost 23 percent for the decade when, in fact, US stocks were flat.
I asked Paul Colford, AP Director of Media Relations, why they continued this practice and received an official response from Kevin Shinkle, AP Assistant Business editor. In his response, he noted I had raised some points of interest and suggested I call him, though he would not speak on the record.
The next quarter, the AP at least printed the total return of the S&P 500 but, by the second quarter, went back to reporting just the index return in a sensationally depressing article on the market, just before a great rally began.
My requests to the AP as to why they went back to this practice and whether they would do this for the year 2010 received no response. My conclusion last year that this practice was driven by ignorance and inertia was proven wrong. The same reporter with the same editor intentionally went back to this practice.
Why the AP will change this practice
Despite all the years of tilting at windmills on this issue, I realize my efforts with the AP have had no effect. That is not to say that other influences won't have an effect. I do think they will change as more and more of the media are at least reporting the total return of the S&P 500. Leading publications like The Wall Street Journal, The New York Times, and here at MoneyWatch, are increasingly reporting total returns. This is a very good thing for consumers and I suspect the AP will eventually be forced to slowly follow and get it right.
Whenever you see market returns being reported through an index, always ask two questions:
- Is this the right index or is the advisor or media comparing apples to oranges?
- Is it the total return of the index or have dividends been stripped to just look at part of the return?
Any bets on what the AP will report at the end of the week?
Author's note: For 2010, the AP reported three narower index returns with and without dividends: For Investors, A Gut-Wrenching 2010 Ends Well.