Whether it’s on your phone, on the nightly news or scrolling on the bottom banner of your web browser, you probably have seen the performance of the market indexes such as the Dow Jones Industrial or the S&P 500. We see the familiar red and green arrows as we go about our days without giving it much thought. Some people bring the indexes up in casual conversation, but few people take the time to really understand what they are or how they apply to them. Let’s break down some basics about indexes, how they work, and what they mean to you.
What are indexes?
Indexes are hypothetical portfolios representing different parts of the financial market. The ones investors are most familiar with are the Dow Jones Industrial Average (DJIA), S&P 500 and the Nasdaq Composite. There are plenty of other indexes that might be less familiar to you.
To state this in simple terms, indexes are groups of company stocks. Depending on how well the companies are doing, their stock prices will move up or down. If times are good and companies are profitable, the indexes will move up. During hard times, the stock prices will decrease, and the indexes will move down.
What makes up the indexes?
S&P 500 -Standard & Poor’s 500 Index is a grouping of 500 of the leading publicly traded companies. Companies with more shares outstanding and higher capital make up the largest percentage. Currently Apple holds the largest percentage of the 500, DaVita Inc, is the smallest of the 500.
Dow Jones Industrial Average, or simply the Dow- The Dow is the oldest and perhaps the most familiar index. It includes companies that are found globally. It includes 30 companies who are ranked by their price. UnitedHeath Group, Inc is the top company with a price over $500 per share, Intel is the lowest ranking with a current price under $30 per share.
Nasdaq- The Nasdaq is one of the largest US indexes. It includes nearly every company that trades on the Nasdaq stock exchange. It is the most misunderstood index because it has some unique characteristics. Some people call it the tech index, although it is not exclusive to any industry. To be included, a company must trade exclusively on Nasdaq stock exchange unless it was there prior to that rule being made in 2004. This means that unless grandfathered in, none of the companies in Nasdaq appear on the NYSE, Philadelphia Stock Exchange, American or another exchange unless they have been there for a very long time. Some of its largest holdings, Apple, Microsoft, Meta, Alphabet, Tesla and others also appear as some of the top positions in the S&P 500.
How does this apply to me?
Aside from giving you something to talk about other than the weather, you may find that it’s helpful to know the current state of the market. It is kind of like looking at a thermometer for your investments. Having an idea of what is going on in the market can prepare you for what is going on in your own retirement accounts and investments. If you are seeing a lot of red days, it probably means that you can expect to see some losses in your account. Keep in mind, it’s just an idea of how things are going in the financial markets. Just because the S&P 500 or Dow Jones is down 10% year to date doesn’t mean your portfolio is down 10%. You have your own group of investments in your personal portfolio and your
portfolio has its own return based upon what you are holding and how much risk you are taking in your portfolio.
Your advisor may discuss the market index’s performance and compare it to your performance. This is called using an index as a benchmark. This same strategy also applies for risk. You can determine if your portfolio has more risk, less risk, or similar risk. An aggressive investor may have a portfolio with nearly as much risk as the S&P 500 whereas a conservative investor may not be comfortable with that much risk. Most people misunderstand how to use an index as a benchmark. Often, we see people judging the success of their portfolio by how it compares to an index. Instead, you should judge your portfolio based on your long-term goals and how well your portfolio is set up to achieve your goals.
Can I invest in an index?
While you cannot invest in the actual index, there are mutual funds and ETF’s that mirror the index. These buy the exact same stocks that are in the indexes and their return can be similar. While this could be appealing, there can be downsides to this type of strategy. Index funds are not actively managed and can potentially carry more risk than an actively managed strategy. Finding a knowledgeable advisor can help you to decide what is right for your portfolio and how it relates to the broad markets
Investment Advisor Representative
Rebecca joined the firm in 2011 as an Investment Advisor Representative. In this role, she works with clients to manage their investment assets and help them obtain their financial objectives. Rebecca brings a great deal of experience to the team having worked for several years at Marshall & IIsley Bank and MetLife. She earned a Masters of Business Administration degree (with an emphasis on finance) from Concordia University.
Advisors Management Group, Inc. is a registered investment adviser whose principal office is located in Wisconsin. Opinions expressed are those of AMG and are subject to change, not guaranteed, and should not be considered recommendations to buy or sell any security. Past performance is no guarantee of future returns, and investing involves multiple risks, including, but not limited to, the risk of permanent losses. Please do not send orders via e-mail as they are not binding and cannot be acted upon. Please be advised it remains the responsibility of our clients to inform AMG of any changes in their investment objectives and/or financial situation. This commentary is limited to the dissemination of general information pertaining to AMG’s investment advisory/management services. Any subsequent, direct communication by AMG with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request.