neurosphere wrote:That's a good idea, to use the Wilshire 5000 as a proxy for SP500 returns with dividends.
And the summary is that the value of the SP500, corrected for inflation, is only nearing its all time high if you take into account dividend reinvestment.
Well, there is a subtle conflation here amongst posters.
1) The worth of the SP500 on a given day, compared to another given day --- should be inflation adjusted, but not include dividends ( "value of the sp500")
2) The worth of an investor who invested in the sp500 on a given day in the past, up to the current day, should be inflation adjusted, and included dividends. ("value of the sp500" to an investor over given period of time)
The dividends paid out, in the past, by the SP500 is a "sunk cost" in terms of what the sp500 is worth at any given momement in time, they are gone already, past dividends has no bearing on current SP500 level.
So to see if the market is worth, what it was worth at some point in the past, you use an inflation adjusted sp500 chart, that ignores dividends. If you want to see what an investor did in the market, use a total growth chart.
So I would say if you are talking about the current value of the sp500, ie, the amount you would pay to purchase a unit share of it going forward, the past dividends are irrelevant, and even if you say they are relevant to you in your future guess, they are certainly not additive per se.... what would be the start date?
Take PG stock, one does not add up the dividends paid out since inception of PG, add it to current stock price, and say PG is worth that now. One just takes the current price of PG in the market, thats what it is worth. PG comparison to past PG in presence of nonzero inflation needs inflation adjustment, but no addition of dividends.
A proctor gamble investors gain from pg, one would take dividends into account, using start date of investor time, and using weights of stock held at given time, in additive fashion. This would yield a nominal gain, as I think, inflation is ignored in these total return charts.
So to really see ones gain from investing in a point in time in sp500, one would have to use a total return chart, and then adjust it for inflation I think.
Another example from another poster:
"So your purchasing power has doubled over 20 years, a full generation."
I know what he means, and he knows what he means but no, your purchasing power has not doubled, this is a conflation, what has doubled is the cost of buying or worth of selling the market. The chart measures the cost of the market, not "your purchasing power", which, as the poster goes on to state, encompasses fees and dividends. Also, points of entry.
You basically would need to do an Internal rate of return, all input amounts and dates of input, and the ending amount of the account to get what an investors purchasing power actually did. Which encompasses all the fees and such in the IRR black box. Then I think about inflation adjusting.... makes my head hurt. As the input dollars, are worth more than the ending dollars.... one would have to inflation adjust each input, in terms of current dollars, then do an IRR I think.