Quantcast

This Deceiving Chart Is Costing You Money (Guaranteed)


Shutterstock photo

By Michael Foster

I saw an interesting tweet the other dayaEUR"someone commenting on how lots of people have no qualms racking up $100,000 in debt to get a university degree but think putting $5,000 into the stock market is too risky.

The foolishness of this thinking is evident to anyone familiar with the stock market. Five-thousand dollars in a bland S&P 500 index fund like the SPDR S&P 500 ETF ( SPY ) would now be worth $12,175 after just a decade. ThataEURtms a lot of money to give up on just because of fear!

And donaEURtmt be fooled: this kind of thinking isnaEURtmt prudence. ItaEURtms fear. People who avoid putting money in the stock market do so because theyaEURtmre afraid that something like the 60% decline of 2008aEUR"09aEURtms market crash (the biggest meltdown in 80 years, by the way) will happen again.

For those familiar with psychology, this thinking is familiar: itaEURtms a mix of the loss-aversion fallacy (peopleaEURtms tendency to avoid small losses more than they will seek big potential gains) and recency bias (the tendency to assume things that happened recently are more likely to happen again, just because they happened recently).

Instead of trying to convince you that this thinking is wrong, IaEURtmd instead like to explain how the media encourages this mindsetaEUR"and how you can spot it. Then I want to show you how it can cost you a lot of money.

How a Simple Chart Switch Dupes Millions of Investors

There is a strong tendency among many news outletsaEUR"some mainstream, some not so muchaEUR"to make bold pronouncements about the future, even when they donaEURtmt have the data to back it up. And since fear gets attention, which is what these outlets need to earn a profit from selling ads, these pronouncements tend to be bearish, if not apocalyptic.

To make matters worse, itaEURtms easy to use charts to make these bearish pronouncements look like they are backed by data, even when they are not. The most common trick is also one of the easiest: use price-return instead of total-return charts.

Before I give you an example, let me explain the difference. The price return measures the return of a stock or index based solely on the change of its market price. The total return measures the return based not only on its market price but also with dividends factored into the equation.

Even with the S&P 500, which yields a paltry 2% or so most of the time, this is a very big deal. Those dividends add up over a period of years, and ignoring them gives you a skewed and inaccurate picture of how stocks actually performed.

One of the greatest permabear stories brought out to scare people into avoiding the stock market is that, from 2000 to 2012, the market was essentially flat. And you can demonstrate this with a price-return chart like this one:

A Flat MarketaEUR"According to One Story


Since the market price of the S&P 500 is reported daily, people are trained to focus on this kind of metric anyway, so regurgitating it doesnaEURtmt even seem deceiving.

However, it really is.

LetaEURtms take a look at how the S&P 500 performed on a total return basis compared to just the price return over the same time period:

Not So Flat Anymore!


The real story is quite different! Admittedly, 32.1% is a poor return over a decade, partly because the market was facing a tough comparison against the dot-com bubbleaEUR"which was an even crazier bubble than the housing bubble that followed itaEUR"but itaEURtms a much better return than 4.5%.

And for long-term investors, this distinction is crucial. Look at how the S&P 500aEURtms price return compares to the total return from 2000 to todayaEUR"itaEURtms nearly half !

Price Return Tells theRealStory


The Price-Return Fallacy on Steroids

I like to call this obsession with price returns, and the wrong conclusions it leads to, the aEURoeprice-return fallacy.aEUR And while itaEURtms important when it comes to the stock market, it becomes much more important when talking about higher-yielding investments.

When it comes to closed-end funds (CEFs) , this thinking is toxic. The reason? Many CEFs are designed to have a flat or even declining market price while also paying dividends of 7% or more. As a result, CEFsaEURtm price-return charts are even more misleading than those of the S&P 500.

Let me demonstrate this with a high-yield example: the PIMCO Corporate & Income Opportunities Fund ( PTY ) , which specializes in corporate bonds and bond derivatives, uses leverage and focuses on paying out a high income stream to shareholdersaEUR"it currently pays a 9.2% dividend.

I mention these aspects of the fund because IaEURtmve heard dozens of financial professionalsaEUR"CFA charterholders, financial advisors, star financial bloggers and financial journalistsaEUR"decry PTY or funds like it as dangerous investments that provide a low return over time. When I asked one advisor to explain this view, he told me to look at the price-return chart for PTY over the last decade.

PTYaEURtms Unappealing Price Return


A 22.4% gain isnaEURtmt good, especially since the S&P 500 is up 96.4% over the same time period.

But again, this is the price-return fallacy. Now letaEURtms add dividends to the mix and see what happens.

A Meteoric Rise


A 333.7% return is very different from 22.4%! Also, youaEURtmd be pleased to know that PTYaEURtms 333.7% total return over the last decade is over twice as big as the S&P 500aEURtms 143.7% total return over the same period.

Those financial advisors who warn against PTY and funds like it are costing their clients money. And their clients are getting fooled because theyaEURtmre getting duped by the price-return-chart fallacy. DonaEURtmt be like themaEUR"always look at total returns.

4 aEURoeOff the ChartsaEUR CEFs to Buy for 8.0% Dividends and 20% Gains

If you went by price charts alone, youaEURtmd easily miss my 4 top CEFs to buy now.

Consider my No. 1 pick of this aEURoe4 pack,aEUR which pays an 8.0% dividend as I write. This sturdy fund, which invests in high-yield real estate investment trusts (REITs) has crushed the S&P 500 since inception, but youaEURtmd never know it from the price chart:

A Winner in Disguise


But when you add its rock-solid 8.0% cash dividend back in, you get a completely different story: a 512% return that more than doubles up the marketaEURtms gainaEUR"in CASH!

Dividends Drive an Easy Double


The kicker: this fund provided a higher return than the stock market even when you factor in the subprime mortgage and Great Recession. And it did it by investing in real estate, the very thing that caused the crisis in the first place.

PLUS they pulled off that stellar performance while paying a dividend of more than 7% the whole time. Right now, its payout is a hefty 8.0%.

If thataEURtms not the definition of a well-run fund, I donaEURtmt know what is.

But the funny thing is, this fund is trading at a 1.5% discount to its net asset value (or what all the holdings in its portfolio are worth right now). ThataEURtms absurd when you consider that this one traded has traded at premiums as high as 16% in the last few years.

I canaEURtmt wait to give you all the details on this battle-tested income play and the 3 other CEFs IaEURtmve hand-picked as your very best buys for 8%+ dividends and 20% upside in the next 12 months. CLICK HERE and IaEURtmll give you the names, tickers, buy-under prices and complete details on all 4 of these aEURoeundercoveraEUR CEFs now .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Options
Referenced Symbols: SPY , PTY


More from BNK Invest

Subscribe






BNK Invest
Contributor:

BNK Invest

Market News, Investing








Research Brokers before you trade

Want to trade FX?