06 Dec What is “The Market”?
Turn on any nightly newscast or open any major daily newspaper and there’s likely to be a segment or an article discussing the recent performance of “the market.” It’s natural for investors to then think about and mentally compare the performance of their own personal account or accounts to “the market.” Prior to doing this, however, I implore all investors to consider specifically what this “market” is that you’re hearing or reading about.
The terms “The Dow,” which refers to the Dow Jones Industrial Average or “the S&P” which is short for the S&P 500 Index are ubiquitous in media discussions of the performance financial markets. Many investors are surprised to learn just how much the media isn’t talking about when they discuss how the Dow and the S&P did, often just yesterday or over the last week (I’ll leave for another post how this incessant focus on very short-term performance is at best useless and at worst counterproductive for long-term investors).
The graphic below from Vanguard provides great perspective on just how broad “the market” really is and how the Dow and the S&P cover just a portion of it.
As you can see in the chart, the 30 stocks which comprise the Dow make up less than 15% of the global stock market while the comparably larger S&P still accounts for less than half of global markets. Of course, we also know that many investors hold portfolios that are not 100% stocks—in fact, in many cases, portfolios hold far less in stocks—and even for those in the relative minority that do hold all stock portfolios, many likely hold portfolios that expand beyond just the 30 stocks of the Dow or those in S&P to also include small cap stocks and international stocks as well. Thus, for many investors, it’s important to recognize that while the Dow and the S&P are undeniably benchmarks, they are most likely not your benchmark for success.
Ultimately, we believe it’s critical and most beneficial for investors to evaluate the performance of their individual portfolios against their specific investment objectives and investment plan and not relative to an arbitrary benchmark (or benchmarks) that happen to be popular in the media and that may not even be an effective representation of “the market” anyway.
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