Many investors realize stocks have been among the worst investments of the past decade. But they may not realize quite how bad the decade was because most forget about the effects of inflation

Despite its 2009 rebound, the Dow Jones Industrial Average today stands at just 10520.10, no higher than in 1999. And that is without counting consumer-price inflation. In 1999 dollars, the Dow is only at 8140.38 and would have to rise another 29% to return to 1999 levels. Using today’s dollars and starting at 10520.10, the Dow would have to surpass 13595.49 to get back to its 1999 level in real, inflation-adjusted terms.

Controlling for inflation takes extra work and makes stock gains look punier, so it is easy to see why stock analysts almost never do it. The media almost never do it either.

But other things do get measured in real dollars. When economists report whether the economy is growing, they account for inflation. When analysts judge long-term gains in commodities such as gold or oil, they often adjust for inflation, noting that gold hit a record this month in nominal terms but remains far from its 1980 record in real terms. Because analysts almost never do the same with stocks, it leaves investors with an exaggerated view of their portfolios’ performance over time.

‘Looking at returns on a nominal basis can be very misleading,’ says Richard Bernstein, a former chief investment strategist at Merrill Lynch who is launching a New York money-management firm called Richard Bernstein Capital Management. He checks inflation-adjusted performance to monitor investments’ real value.

A few analysts trying to get a better perspective on investments’ performance have taken to measuring the Dow in a variety of unconventional ways. Gold bugs look at the Dow based on gold prices, which makes its performance look much worse over the past decade. Europeans and others with international investments sometimes measure the Dow’s return in euros. That makes the Dow look worse since 2006, a time when the euro has been rising. The dollar’s recent rebound has helped make the Dow look a little better against the euro and gold, however.

Mr. Bernstein says some investors saving for education expenses compare returns to tuition inflation. If the portfolio doesn’t rise as fast as education expenses, these investors reason, they will need to boost contributions. The same is true for someone saving for retirement expenses or for future medical costs.

Garrett Thornburg, founder of Thornburg Investment Management in Santa Fe, N.M., calculates what he calls ‘real-real’ returns, adjusting stock performance not only for inflation but also for real-world drags such as taxes and fees. Nominally, a dollar invested in the stocks of the Standard & Poor’s 500-stock index at the end of 1978 had blossomed to $22.88 at the end of 2008, including dividends, a sweet gain even after the 2008 meltdown. But once estimates of inflation, taxes and costs are removed, he figures, the investment was worth $3.76.

All of this might be enough to put investors off stocks entirely, until they consider the long-term alternatives. Measured over the 1978-2008 period, rather than over just one decade, stock performance in real-real terms actually is better than that of just about any other major investment class, Mr. Thornburg found: 4.5% a year. Stocks’ ability to keep up with inflation over the very long haul may be their best selling point.

In real-real terms, stocks did better over that period than municipal bonds (2.5% a year), long-term government bonds (2% a year) and corporate bonds (0.2% a year). Real-real home prices were unchanged over those 30 years. Both short-term government bonds and commodities suffered losses. (Mr. Thornburg has experience investing in all these areas, although his mortgage affiliate went bust in last year’s housing collapse.)

Figuring out how to adjust for inflation can mystify some investors, although the Internet now offers several Web sites that quickly adjust numbers for inflation and some mutual funds and independent mutual-fund analysis services calculate returns adjusted for fees and taxes.

Prof. William Hausman at the College of William & Mary long has urged the media to offer people inflation-adjusted stock charts. He says newspapers and analysts frequently point to the Dow’s 2007 record of 14164.53 and talk about how far the Dow would need to climb to return to that level. In inflation-adjusted terms, however, the Dow in 2007 never quite surpassed its 2000 record, Prof. Hausman calculates. To return to an inflation-adjusted record now, he adds, the Dow would need to break 15000.

‘It really puts in perspective how stocks are doing,’ Prof. Hausman says.

Stock analysts sometimes like to note that the Dow today is worth 27 times its value at its 1929 pre-crash peak, meaning that even if you bought at the worst moment, your stock still would be way up over time. In inflation-adjusted terms, however, the Dow today is only a little over twice its 1929 peak, according to Ned Davis Research.

Lately, some investors have gotten interested in measuring the Dow in gold rather than dollars. Gold has rebounded since 1999, and the fascination with the yellow metal has made investors start thinking of it again as a currency.

Ned Davis, the founder of Ned Davis Research, referred to gold as ‘real money’ in a recent report and published charts of bonds, home prices and stocks measured in gold rather than dollars. Even with gold’s swoon in recent days, the Dow looks a lot weaker over the past decade measured in gold than in dollars.

Of course, it is possible to find a hot investment that dwarfs the Dow’s gains over any period, which makes many analysts question the value of adjusting the Dow for gold’s gains. Such skepticism doesn’t stop gold’s supporters from pointing out how much weaker the Dow looks when measured in ‘hard’ money.

In 1997, the Dow looked strong at 40 times the dollar value of an ounce of gold, notes John Hathaway, who oversees the Tocqueville Gold Fund at New York’s Tocqueville Asset Management. With gold’s rebound since 1999, the Dow now is worth about nine times an ounce of gold, meaning simply gold has performed a lot better than the Dow.

E.S. Browning