When people talk about “the market,” exactly what are they talking about? More than likely, they are talking about one of two indexes that are widely reported in mainstream media, financial networks, and many daily publications. These two indexes are the Dow Jones Industrial Average (DJIA) and the S&P 500. Let’s explore both indexes to get a better understanding of exactly what the indexes are reporting.
The DJIA and S&P 500
On May 26, 2016, the DJIA celebrated its 120th birthday. Back in May of 1896, journalist Charles Dow (who went on to found the Wall Street Journal) averaged the stock prices of 12 individual companies, resulting in the first Dow average of 40.94. In 1916, the Dow grew to 20 stocks and in 1928 it grew again to 30 stocks – which is where it still stands today. Even though the Dow is 120 years old, it is not the oldest index. That honor belongs to the Dow Jones Transportation Average that Charles Dow started in 1884 with 12 railroads, which were, at the time, the largest companies in the U.S.
Even today, the Dow has no transportation or utility companies in the index. Furthermore, none of the current stocks have been part of the Dow since its beginning – although General Electric had a pretty good run. GE was one of the original 12 stocks in 1896, but was removed in 1898, reinstated in 1899, removed again in 1907, and reinstated for the last time in 1907 (89 years ago).
The DJIA is slightly less volatile than other broad market indexes (more on the S&P 500 below), even though it holds only 30 stocks. This is primarily because the stocks in the DJIA are some of the largest in the world and are less volatile, in general, than broader market indexes that include smaller and more volatile stocks. Finally, the DJIA has been up for 78 of its 120 years and has grown from 40.94 to around 17,800 today.
Today one of the most often quoted market indexes is the S&P 500, which is essentially the market-value-weighted price (shares outstanding X current share price) of 500 major companies. The foundation of the S&P 500 was laid in 1923 when the S&P 233 was introduced. The S&P 233 was a weekly average index of 233 stocks. In 1926, the S&P 90 begin reporting a daily average of 90 stocks. In March 1957 the S&P 500 was introduced. Since the beginning, index value reporting has grown from weekly reporting to daily reporting to now being reported in real-time, calculated instantaneously.
Many individual investors compare their portfolio performance to one of the two major indexes above. This is often not helpful because, as explained, the DJIA and S&P 500 are made up of very large companies, some of the largest in the world. In addition, in the account statements you receive, you may have noticed that additional indexes (like the Schwab 1000 index and the NASDAQ Composite index) are prominently displayed. However, these, or any other indexes, are likely not the best tool to help you judge your personal return on your individual portfolio.
In reality, your portfolio allocation and its performance is a function of the goals and objectives you have set for your own portfolio. In all likelihood, your investment portfolio is made up of various asset classes such as stocks, fixed income (bonds), and real estate. Then, even within each asset class, your investments cover several sectors such as large company stocks, midsize company stocks, small company stocks, and international company stocks.
Individual investors like you can afford to be more patient, take a longer-term view of market moves, and examine performance from a variety of perspectives. A good option may be to select several benchmarks and review performance periodically – such as annually.
We believe that in their book titled Adaptive Asset Allocation, authors Butler, Philbrick, and Gordillo might have said it best. “Those who judge their portfolio by its performance relative to some narrow benchmark are focusing on an issue that is largely irrelevant to their ultimate financial success.” And, “The only benchmark that you should care about is one that indicates whether or not you’re on track to accomplish your financial goals.”
If you have any questions or concerns about your portfolio’s returns or your portfolio’s alignment with your long-term goals and objectives, please give us a call.
Thank you very much for the trust and confidence you have placed in our firm. It is our privilege and honor to serve as your financial advisor.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.