Most popular indices for example only capture the price performance of its constituents typically weighted by capitalization (S&P 500) or just price (Dow Jones Industrials). What they don't capture, however, is the impact of dividends, especially when they are reinvested. Total return indices do exist, but they are unfortunately much less common and therefore rarely used and so investors are much less aware of them.
Even more rare are indices that are adjusted for inflation. That type of information is just not published but the impact can be very significant.
To show just how significant the effect of dividends and inflation can be on the return of an index, researchers in the U.S. did the calculations on the Dow Jones Industrials index and here is what they discovered:
If dividends were included since the inception of the DJI in 1896, it would have a value of more than 1,300,000 which is more than 100 times its recent high of 13,000!
If it was adjusted for inflation over the same period, it would shrink to a value today of around 500 which his about 96% below its actual current value.
Finally, if we were to combine the impact of reinvested dividends and inflation, the figure would be around 47,000 or almost 4 times its current value! In other words, the impact of reinvested dividends seems to be substantially greater than the impact of inflation (assuming inflation is correctly measured of course!)
All this to say that it is important to be aware of what exactly is being measured (or not) when looking at an index. Just as in the differences between price weighted and capitalization weighted indices, the effect of including dividends and/or inflation can lead to substantial differences in the results.
