S&P 500 Hits a New Record: How Important Is That?
Yesterday the S&P 500 Index hit its all-time high, finally topping the previous high of 1565 in October 2007. It was up again today, another new record.
How important is that? Are investment advisors and portfolio managers celebrating? Should you?
The S&P index is an important gauge of the US stock market. The stocks in the index represent approximately 75% of the total value of the US stock market.
However, just looking at the index value is a mistake. The index value does not take into account the effect of reinvesting dividends from the stocks in the index. According to S&P, dividends accounted for 44% of total return over the last 80 years.
What this means: Saying the index exceeded its previous high makes it sounds like an investor was barely ahead. The index peaked at 1565 in 2007 and today it is 1569. Only a .3% difference.
But investors in those stocks also received dividends. The index plus reinvested dividends was actually up 13%.
Those figures are from the market peak. If you measure from the last market bottom (March 9, 2009), the S&P 500 is up 132% without dividends and 150% with dividends (Washington Post, March 29, 2013).
Most foreign stock markets lag behind. In many cases, way behind. According to the New York Times, an” index of the entire world’s stock market, without the United States, is still down about 29 percent from the level it hit in 2007…”
It is also important to correct for inflation. Inflation reduced purchasing power by 11% from October 2007 through February 2013. So the purchasing power of the S&P 500, even with reinvested dividends, only increased approximately 2%.
If you invested at the bottom of the market, your purchasing power would have increased approximately 138%.
Most investors don’t invest all their funds at the top or bottom of the market. They invest over time. And over long periods of time, stocks have usually – but not always -- done well.
Of course, there is no guarantee that stocks will do well in the future and you cannot invest directly into an index.
This presentation is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional before implementing. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
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- Past performance is no guarantee of future performance;
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- “Average annual return” evens out variations in the actual year-to-year returns.
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