The 4th quarter is when most investors start to look at their portfolios and gauge how they have done for the year. The issue that many face is what should they use as a benchmark to compare their performance? We often hear people using the data that is shared on the nightly news, newspapers or websites. While this is a good starting point, it is far too simplistic and does not paint a valid picture for any investor.
In this day in age, many individuals rely on the internet for their information, if you go to Google Finance, they highlight three indices to provide an overview of the equity markets; The Dow Jones Industrial Average (DJIA), the S&P 500 and the NASDAQ. While each of these provide a snapshot of the market, none can be used as a broad indicator. Each one has a narrow focus on a specific market cap or industry.
- Dow Jones Industrial Average – A price-weighted average of 30 stocks traded on the New York Stock Exchange and the NASDAQ. The index was created in 1896 by Charles Dow.
- S&P 500 – An index of 505 stocks issued by 500 companies with a market capitalization of at least $6.1 billion. Considered the leading indicator of U.S. equities and large-cap stocks.
- NASDAQ – An index of 3,000 technology stocks traded on a global electronic marketplace created by the National Association of Securities Dealers. This platform was created to offer investors the ability to trade securities on a computerized system on February 8, 1971.
You don’t have to look very deep to see the flaws with each of these indices. With the DJIA you are only looking at 30 stocks, and often less than that when you account for the fact they are price-weighted. The S&P 500 is certainly broad but it is focused on large-cap stocks. And last, the NASDAQ is concentrated in technology stocks. If you focus on these indices you are missing out on key components that are part of any well-diversified portfolio. You would be missing Mid-Cap stocks, Small Cap stocks, International Markets, Emerging Markets and Fixed Income…to name just a few. In our monthly newsletter, we share year-to-date performance numbers for several indices. Do you know what is the best performing year-to-date? Many are surprised to learn it is Emerging Markets, which is up nearly 30%! (DJIA + 18%, S&P 500 + 15% and NASDAQ + 25%). Contact us if you would like to receive our monthly newsletter.
A well-diversified portfolio will offer exposure to different market caps, industries and countries. Focusing on only one would be like going to the doctor for your annual physical, and having your diagnosis based only on your handshake upon greeting. Take the time to know what you own, why you own it, and why it warrants a place in your portfolio. If you need assistance reviewing your portfolio we encourage you to contact us at your convenience.