The stock price charts: Have you ever wondered why the companies care so much about it?
Just about anyone that takes a look at their charts will be wrong when it comes to their conclusions on performance. Why is this? Just about all of the charts are basically ex-dividends and distribution. The dividends and distributions turn into price dropping by the total of that distribution or dividend as the payments are made to any underlying shareholders.
Many times, the dividends and the distributions are then reinvested right away back into a mutual fund or stock while the shares are purchased in the amount of the cash payment, which increases the position size with a much lower market price where the total position value remains untouched.
The stock price charts do lie because most are not showing a total return and this matters a great deal. Return on investment will come from the stock price plus any dividends or distributions and any subsequent compounding that comes from it. This cannot be stressed enough. Stocks may seem to be going sideways or looking like they have gone down for a while, but when you include distributions and dividends, the investment may have made you some money.
You can also see a similar problem with an incorrect view of your investment performance while looking at broker statements. When you are looking at the gains or losses of a position, many statements will tally the gain or the loss based upon the cost and the statement date price of the investment. What will not be shown is the actual gain or loss of the investment when you incorporate dividends.
Total return is going to be everything. Media may quote performance and S&P 500 Index levels, but what you hear in the media may not be total return. What you should know is that nearly all of the headline market averages that are referenced will be price only and not the total return.
Why this matters is that the level of the S&P 500 Index today is not the true performance that you get from investing in stocks. You will find that it looks remarkably difference when you include all of the dividends since inception.
The stock price charts only look at the price, and this is incorrect. They should not be used to assess investments, whether it is a bond, stock, mutual fund or anything else. In order to get the best information, you need to look beyond the price and tally everything to include the total return.
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