“The market hit another new all-time high.”
“The market is in the midst of one of the longest growth periods in history.”
“Why are my returns different from the market?”
We’re constantly bombarded with headlines referring to the performance, good or bad, of the stock market. Naturally, as investors it’s easy to get caught up in the fluctuating numbers and start making comparisons to your own investments, but there are some very important reasons why that is not a good idea. Below you’ll find some common terms used when discussing “the market”, along with a brief definition explaining their meaning. You’ll soon see that the makeup of these stock market indexes are likely very different from your own portfolio of investments, and that is a very good thing!
Common stock market indexes
“The Dow” (Dow Jones Industrial Average) – For more than a century, this market index has been plastered all over the front page of newspapers and the breaking news tracker at the bottom of your television screen. But what exactly is “The Dow”? To put it simply, “The Dow” is a stock index that tracks the values of 30 of the largest publicly-traded US companies. Yes, you heard that right–only 30 of the largest US companies are tracked.
“The S&P 500” (Standard & Poor’s 500 Index) – This market index is largely considered the more accurate, broader measure of the US stock market, since it is comprised of 500 companies. It is important to note, like “The Dow”, this index is only comprised of large, American companies.
“The Nasdaq” (The Nasdaq Composite Index) – Have an interest in technology stock? You’ll most likely be tracking this market index. Comprised of over 3,000 stocks, nearly half of those found in “The Nasdaq” are focused on the technology sector in the US.
How do these stock market indexes affect me?
When evaluating your personal rate of return in your retirement account(s), remember that these commonly cited stock market indexes are not always an appropriate representation of the investments in your 401(k). Therefore, the market indexes above should not be used as a barometer for making investment decisions, such as altering your long-term, globally diversified strategy.
Again, it is vital to remember that these indexes are created to give us a glimpse into how a small segment of the global financial market is performing at any given moment or over any given period of time. Unless you have all your eggs in one of these baskets, it’s best not to use any of these indexes as an absolute benchmark for your personal, long-term and diversified strategy.
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The information is provided for discussion purposes only and should not be considered as advice for your investments. Investors should consider their ability to continue investing through periods of fluctuating market conditions.
Published on February 14, 2020