67 Pages Posted: 22 Jun 2020 Last revised: 18 Nov 2021
Date Written: June 2020
Investors' perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends thereby underreporting market performance. Newspapers are more pessimistic on ex-dividend days, consistent with mistaking the index for returns. Market betas should track returns, but track prices more than dividends, creating predictable returns. Mutual funds receive inflows for “beating the S&P 500,” price index based on net asset value (also not a return). Investors extrapolate market indices, not returns, when forming annual performance expectations. Displaying returns by default would ameliorate these issues, which arise despite high attention and agreement on the appropriate measure.
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