On December 1, 1998, the Diamonds Trust ETF, which mimics the Dow Jones Industrial Average, closed at $91.27.  If you had invested $100,000, you would have ended up with 1,095 shares.  Along the way, you would have collected $22.886 per share in cash dividends.  To make this easy to understand, think of it as a reduction in cost basis.  Your break even point would now be $68.384 per share ($91.27 cost basis - $22.886 dividends received = $68.384 is the point you lose money).

The ETF now trades at $103.14.  That means that your gain is $34.756 per share ($103.14 current market value - $68.384 adjusted cost basis to reflect dividend income).  Compared to your original cash outlay of $91.27 per share, this represents a gain of 38.08% over ten years.  Your investment portfolio would be worth $138,057.82.

What is the compounded rate that represents?  We have to perform a calculation that involves something known as the "X Root" to figure it.  You take the total years (10 in this case) and divide it into the number 1.  The answer, 0.10, is going to be used in the next step.  You then take the gain, expressed as 1.3808 and raise it to the 0.10th power.  The answer is 1.032792505601167.  In other words, your stock investment compounded at 3.279%, or almost exactly the rate of inflation.   Read more...

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