Misconceptions about the S&P 500 index

Let's start by looking at some fun facts about the S&P 500 Index:

• S&P 500 index closed at 1334 at the end of 2000
• S&P 500 index closed at 1257 at the end of 2010

The index was down 5.77% over the 10 year period.
That is an annualized rate of -0.56% for 10 years.

However, if one had invested $10,000 in the S&P at the end of 2000, then as of Dec 31, 2010, they would have had $11,507. That's a 10 year total return of 15.1%, which comes out to a 1.41% return annually for 10 years.

So what?

The S&P is a free floating market capitalization adjusted index. So it is true that whenever a company pays dividends, then S&P adjusts the weighting of that company in the S&P 500 accordingly, because the dividend distribution changes the market cap. However, the dividends that those companies actually pay out are NOT reflected in the S&P index, even though most investors of S&P 500 index funds do reinvest the dividends.

So it's the reinvested dividends that account for the discrepancy. S&P 500 index does not reflect those dividends, but "growth of 10,000" figure does.

It is misleading to say that the S&P 500 index is adjusted for dividends. Only the weighting of the company based on market cap is adjusted. The dividends themselves are counted as a distribution OUT of the S&P 500, and therefore not reflected in the index itself.

Basically, I am just sick of the distortion of the facts in the case of so many reports of the S&P being lower now than it was 10 years ago. That part is true, but then they usually go on to say that you would have lost money in the S&P over the past 10 years, which is NOT true.

Now granted, a 1.41% annualized return is pretty dismal, but making $1,507 profit on every $10,000 invested is a far cry from being a loss.

I guess I feel like this type of distortion makes the average person feel like stocks are not a good investment by making them feel like they will lose money.