Another Bad MSN Money Article

Link to article - "Stock market's real return? Paltry".

There are so many things wrong with this article...

First and foremost, he excludes dividends. Intentionally! Most of the time when dividends are excluded by people trying to calculate long-term returns of the stock market they do it out of ignorance. He does it for convoluted reasons. Basically, he says because most people don't reinvest those dividends. Therefore, they don't count. That is ludicrous. Even if people do not reinvested dividends, it is still a return on your investment. That is like saying if the stock goes up 10% and you take out 5%, then that stock really only went up 5%. Silly, right?

I checked up on this guy and he's got a finance degree and works for a financial consulting company. Yet, he doesn't understand the dividends should count? Well, they should and do. They account for about half the returns from the stock market over the long term, so not counting them is a huge oversight. Nowadays it's very easy to automatically make your dividends reinvest with index funds.

He also doesn't give a realistic better alternative to the stock market for your investments because there isn't one. Yes, inflation eats at your returns, but it takes a bigger bite out of bonds and cash -- which he fails to mention. His only alternative is a basic technical analysis plan. Using technical analysis to move in an out of the market is a good way to rack up commissions and to miss the big jumps. Don't use technical analysis. It is akin to astrology. There is no concrete evidence that any technical analysis scheme really works over the long term. Not only that, but the proponents of technical analysis often disagree. If it were really that easy to beat the market, why is he sharing the secret with you? Even outperforming the market by a few percentage points can mean millions of dollars, so he would have no reason to share it with us.

One thing he is right about is that the real return (compounded annual growth rate minus inflation) of the market over the last 10 years is -3%. This is not a reason to not invest. It is a reason to invest. When is the last time we had a 10 year period like the last 10 years? The 70s. And the following 20 years were extremely profitable for investors. The people that made the most money were the ones that continue to invest in the stock market during the 70s and early 80s. He also fails to mention that if you started your real return calculations 20 years ago to today, you have a real return of about 5.25% -- which beats bonds and cash and isn't too far off from a long-term real return of the stock market of 7%.

How can someone educated in finance get it so wrong? I don't know, but it doesn't really matter. What really matters is how much money you put in and how much money you get out in the long run from your investments. And, despite being imperfect, nothing beats the stock market. With consistent, regular investing in index funds, you will get the most out of your money.

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