Why Stocks Did Better Than You Think Last Year

Should investors have been disappointed by last year's flat stock market?

Probably not, because indexes don't measure the true changes in your wealth. And there's a bigger lesson for anyone saving for retirement.

The fact that the S&P 500, and the SPDR S&P 500 (SPY) , the exchange-traded fund that tracks the index, were basically flat (down 0.7%) for 2015 can be somewhat misleading. What really matters is the purchasing power of your holdings, or what you can buy with the proceeds when selling your portfolio.

By two key measures, anyone who held a broad basket of stocks, like those in the major indexes, actually saw their wealth increase meaningfully. How so? In 2015, the dollar appreciated by about 10% against the currencies of America's major trading partners, according to data from the St. Louis Federal Reserve. That dollar surge means that a portfolio consisting entirely of S&P 500 stocks had about 10% more purchasing power at the end of last year than at the beginning, because goods and services bought from overseas were that much cheaper than they had been at the year's start.

It gets even better.

The flatline S&P data doesn't include dividends. So really, the return would have been around 11% to 12%, when factoring in the less than 1%  slip in the index. Ask any investor whether that's a good return and they'll tell you that annual returns of 12% are awesome.

"It's the difference between nominal and real returns,"  says Greg King, CEO of REX Shares. "If the index number is down, then that's a big headline, but the reality is that the index number may not reflect changes in wealth and purchasing power.

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