Understand Your Benchmark When Markets Are Volatile

Markets have been volatile thus far in 2020, and you may be wondering how your investments are holding up. To gauge the performance of their investments, investors often turn to the Standard & Poor’s 500 (S&P 500) Index, which is widely used as a benchmark for the performance of equities. But is this the right approach?

The S&P 500 is not the only benchmark of investment performance. Designed to be a broad indicator of stock price movement, it consists of 500 leading companies in major industries chosen to represent the American economy. But the index has limitations. The S&P 500 tracks only a small percentage of the more than 5,000 stocks listed on the New York Stock Exchange, and it consists of primarily large-capitalization companies. But what if you don’t hold large-cap stocks? What if your portfolio is comprised of small-cap stocks or international stocks as well? In that case, the S&P 500 may not be the best benchmark for you.

There are other benchmarks. A bond fund might use the Bloomberg Barclays US Aggregate Index; an emerging-markets fund might use the MSCI Emerging Markets Index. If you invest in a mutual fund, your prospectus and quarterly reporting materials will likely indicate which benchmark your fund uses.

Know, though, that even if you are looking at the appropriate index, there are nuances you may not be aware of. For example, some indices are not equally weighted, so the strength of just a few popular stocks can boost the index’s return significantly.

That means it is important to find the right index and understand that differences in performance may be explained by differences in the composition of your fund versus the index.

Please reach out to me if you would like help understanding which benchmark is most appropriate for your investments.