In response to my February 23 column, answering Thorsten, Elizabeth S. writes:
“Money Magazine, on page 26 of the March issue, says that the stock indices DO include dividends! Gotcha! 🙂 “
Well, if Elizabeth got anybody, I guess it would be Money. In misanswering a question from a reader, Money says that “both the indexes and the index funds include reinvested dividends.” I’m sure this is a shorthand of what Money actually meant to say. Actually, neither the index nor the net asset value of an index fund includes reinvested dividends. But in calculating overall returns, magazines like Money and the rest do (quite properly) add dividends to their calculations.
Look at it this way. If the Dow starts the year at precisely 9000 and ends, by coincidence, precisely at 9000, it has not gone up at all. But that 9000 figure does not say anything about the dividends paid out along the way. If you add them into the total return, it might be 2% or so. Likewise, index fund prices reflect only the price of the underlying indexes. Dividends are passed through on top of that. So when calculating the overall return of the index fund, magazines like Money will add the dividends.
(If you doubt that Money can err, note page 22 of the same magazine — corrections from the January and February issues.)
To the February 26 column on Mutual Fund Disclosure — in which Jeffrey complained that reports issued so long after the fact meant he was buying a pig in a poke — Mark Hiatt offered this thoughtful response:
“I have this theory that people’s desire to trade is directly proportional to the amount of financial information they receive. If you could dial up Fidelity or American Century on the web and see what trades they had made today, I think an awful lot of people would feel compelled to somehow act upon that information.
“When all I saw was a USA Today green section now and again, I didn’t think much about trading. WORTH or SMART MONEY would show up once a month and I’d check my meager portfolio and see how I was doing, but would rarely be moved by some story to actually change my humble investment philosophy.
“But NOW! Now, I get 20-minute and 15-minute quotes from several web sites and real-time quotes from Schwab and headline business news pumped into my home page every six or ten minutes… Now, I find myself tempted to trade several times per day. I’ve managed to talk myself out of INTC just in time to miss its runup. If I had held on, I’d still have the commission and the gains. And I’ve bought into several Next Big Things that have turned out to not be so hot.
“I wonder how well Warren Buffet might have done, had he lived in NewYork and watched a ticker-tape machine all through the ’60s and ’70s and ’80s?”
Mark refers here to the irony that the most successful man on Wall Street, Warren Buffett, has rarely come anywhere near Wall Street, operating instead from an office in Omaha — with no quote machine in his office, and trading very rarely.
The Internet is a mixed blessing for the small investor. It wonderfully cuts commissions and goes a good distance toward leveling the playing field in re access to timely information. (Sorry about the “in re.” I had dinner with a lawyer.) But it also turns the whole thing into something suspiciously like Atlantic City. Fun (at first, anyway), but dangerous — and not investing.
Have a good weekend!