Wednesday, September 12, 2007

Battle of the Stock Indexes

Following yesterday's post, I decided to take a closer look at several broad stock indexes and try to calculate the average return that they offered to investors over the course of their entire existence. For this little exercise, I selected the following indexes: Dow Jones Industrial Average; S&P 500; NASDAQ Composite Index; Wilshire 5000; and Russell 2000.

Before I tell you the results of my inquiry, I would like to point out that I had some difficulty finding the year in which some of these indexes were first introduced, as well as some of the base values at which they were introduced. In the end, I think I got the correct numbers, but if anyone can spot a mistake, please let me know so I can correct it. Also, I would like to point out that the numbers are approximate, since I did not account for the fact that 2007 has not yet ended.

Without further delay here is what I have found:

Dow Jones Industrial Average
Year of Introduction: 1896
Base Line Value: 40.94
Average Annual Return (Sept 11, 2007): 5.35%

S&P 500
Year of Introduction: 1957
Base Line Value: 44.06
Average Annual Return (Sept 11, 2007): 7.27%

NASDAQ Composite Index
Year of Introduction: 1971
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.47%

Wilshire 5000
Year of Introduction: 1980
Base Line Value: 1404
Average Annual Return (Sept 11, 2007): 9.12%

Russell 2000
Year of Introduction: 1984
Base Line Value: 100
Average Annual Return (Sept 11, 2007): 9.35%

These results are very interesting. First off, as I commented yesterday, the return on the Dow since its introduction is dismal. The S&P is the second oldest of the indexes I examined, and it too offers lackluster performance, although it is certainly more attractive than the Dow. The remaining three indexes are all substantially newer and all offered significantly better returns.

What do these results mean? Are the low returns on the Dow an artifact of the much less developed financial markets of the late 19th and early 20th centuries? Or are the higher returns exhibited by the Wilshire, NASDAQ and Russell simply the result of a fluke that has allowed them to so far escape from a protracted bear market? Am I simply making an error or overlooking something basic? Once again, I think I will continue to look at this question I stumbled across, and will keep you informed of my findings.


TFB said...

I think your calculation excluded dividends and reinvestment of dividends. The dividend yields were higher in the earlier years. NASDAQ stocks don't pay much in dividends.

Anonymous said...

You need to compare them over the same time period. That will definitely affect the numbers.

Traciatim said...

I agree with anonymous. It would be nice to see the in the Dow section the return since inception. Then in the S&P 500 the return of the dow since 1957 and the S&P since inception. Then the NASDAQ have the Dow since 1971, the S&P since 1971 and the NASDAQ since inception and so on.

DR said...

Agree with tfb, you definitely need to factor in dividends, which are particularly important to the DOW and S&P 500. In fact, since 1926 dividends have accounted for about 1/3 of total return.

Shadox said...

TFB, you make an excellent point. Dividends are certainly not included in my calculations, and they may substantially increase the return on the Dow and S&P numbers. My numbers only relate to capital appreciation.

I will revisit this issue with additional data, after I am able to locate a reliable source for this information.