Everyone lies, especially stock indices

The Dow Jones is a price index, so it doesn't give you anything other than what it's supposed to: price! The vast majority of investors follow its performance without even knowing that this index was not designed for that. In fact, a price index does not take into account dividends paid by the underlying companies. Most stock indices around the world are price indices, such as the CAC 40 or the SMI.

To take into account the impact of dividends, we must base ourselves not on a price index, but on a performance index, such as the DJITR, the CAC 40 GR or the SPI for example. Most price indices have their "total return" performance equivalent. If we had counted the dividends since its launch on May 26, 1896, the Dow Jones would today be at 1,300,000, not 13,000, or 100 times more!

The deception doesn’t stop there. The indices aren’t just lying to you because they don’t take dividends into account. They also shockingly ignore inflation and currency devaluation, which go hand in hand. Looking at the Dow Jones over the past ten years, you might think that the now-famous “lost decade” wasn’t so catastrophic for America’s big caps.

But during the same period the dollar lost more than 35% against the Swiss franc. In the end you could have obtained a similar profitability with less risk by investing in bonds... Worse, taking into account inflation since its creation in 1896, the Dow Jones would today vegetate at only 450! We can therefore understand the interest of certain investors for the yellow metal.

Now let's consider the "true" value of the Dow Jones, taking into account both dividends and inflation. This theoretical index would be around 47,000 today, which is quite an achievement considering the weakness of the greenback. Dividends therefore put the need to cover one's portfolio with gold into perspective. 

Since 1871, the S&P has posted an annual total return of 9.2%. Inflation contributes just under a quarter of this return (2.2% per year), as does real capital growth (i.e. inflation-adjusted price movements). As for grandpa's "boring" dividends, wisely reinvested year after year, they have contributed more than half of the total return, or 4.8% per year!

In the end, price indices only show a small part of the picture, and no one seems to care. Dr. House was right: "Why put TVs in the bedrooms of people who are in a coma?"