Benchmarks – What Is A Benchmark And Where Does It Come From?
On Women and Money last week, we frequently mentioned “the benchmark”, asset managers who didn’t beat the benchmark, stocks that are measured against an index or benchmark…and ultimately, we promised to define what a benchmark was.
A benchmark, as it pertains to investing, is a standard used for comparison in order to gauge performance of a stock, bond, or mutual fund.
Which benchmark is used is determined by what is an appropriate measure for the stock, bond, or mutual fund. For instance, if a mutual fund invested primarily in large, US corporations listed on the New York Stock Exchange, then the Dow Jones Industrial Average could be an appropriate benchmark for comparison.
If this mutual fund then returned 10% in a certain period of time, while the Dow Jones Industrial Average returned 5% in the same period of time, then the mutual fund is said to “outperform its benchmark.” Whether you’re investing for beginners or a seasoned pro, you need a comparison or a benchmark to compare your results against. Wall Streeters have long been accused of picking a benchmark that suits a particular performance, rather than always going up against the most common, and best known indexes.
There are lots of indexes, all of which produce a benchmark/average/index. Here is a partial List Of Financial Market Indexes, an excerpt from Ms Morrison’s Dictionary of Useful Financial Investment Terms
- Dow Jones Industrial Average – Although Charles Dow compiled the 30 stock index to gauge the performance of the industrial sector within the US economy, the index’s performance continues to be influenced by not only corporate and economic reports, but also by domestic and foreign political events. The Industrial portion of the name is largely historical, as many of the modern 30 components have little or nothing to do with traditional heavy industry. Its price-weighted average compensates for stock splits and other adjustments.
- S & P 500 Index – The S&P 500® has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in 1957. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities. The S&P 500 is a market value weighted index – each stock’s weight is proportionate to its market value.
- S & P Mid-Cap 400 Index – This Standard & Poor’s index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. S&P 400 MidCap Index is a value-weighted index, meaning that the stocks with the largest market capitalization have the most significant impact on the movement of the index. Similarly, smaller movements in the smallest companies in the index have virtually no effect on the overall movement of the index.
- NASDAQ Composite – The Nasdaq Composite is comprised of over 3,000 common stocks, limited partnerships, ADRs, of both US and non-US companies. It’s followed as an indicator of the technology and growth company stocks’ performance.
- Russell 1000 Growth – The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
- Russell 1000 Value – The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values.
- Russell 1000 Index – The Russell 1000 Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the Russell 3000 Index
- Russell 2000 Growth – The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
- Russell 2000 Value – The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
- Russell 2000 Index – The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
- Russell 3000 Growth – The Russell 3000 Growth Index measures the performance of the broad growth segment of the U.S. equity universe. It includes those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values.
- Russell 3000 Index – The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
- Russell MidCap Growth Index – The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. It includes those Russell Midcap Index companies with higher price-to-book ratios and higher forecasted growth values.
- Russell MidCap Value Index – The Russell Midcap Value Index measures the performance of the mid-cap value segment of the U.S. equity universe. It includes those Russell Midcap Index companies with lower price-to-book ratios and lower forecasted growth values.
- Russell MidCap Index – The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 27% of the total market capitalization of the Russell 1000 companies.
- Wilshire 5000 – Once 5000 stocks, this index now comprises over 6,700 stocks of publicly traded companies that are US headquartered, actively traded on the American Stock Exchange and are readily priced to the public. It’s a market capitalization-weighted index, which overweights higher firm value companies, and underweights those with a lower firm value.
- Wilshire REIT Index – A market-weighted index of real estate partnerships, Real Estate Operating Companies, otherwise known as REOCs, and publicly traded real estate trusts, otherwise known as REITs.
- EAFE – Europe, Australia & Far East Index, is an unmanaged market-value weighted index that measures the condition of overseas stock markets. Countries represented in the EAFE include France, Germany, UK, Japan and Hong Kong.
- MSCI World Index – An index consisting of a wide selection of stocks traded in 23 developed countries. It is market capitalized weighted and is considered an important benchmark of the state of global stock markets
- MSCI Europe – An index consisting of a wide selection of stocks traded in 23 developed countries- Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. It is market capitalization weighted and is considered an important benchmark of the state of global stock markets.
- MSCI Emerging Markets – a market capitalized idex that measures the stock market returns of 21 emerging countries– Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey
- Lehman Aggregate Bond Index – the best total market bond index used by more than 90% of all US investors, which includes government, mortgage-backed, asset-backed and corporate securities to simulate the entire universe of bonds whose maturities are over 1 year.
- Lehman Government Bond Index – This index tracks most all of the US Treasury Bonds and US Government Agency bonds in the US, including the 1-3 Year Government Index as well as the 20 plus year Treasury Index.
Russell 3000 Value - The Russell 3000 Value Index measures the performance of the broad value segment of the U.S. equity universe. It includes those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
Did Hurricane Irene Meet The Media’s Hyped Expectations?
It was a slow news week as Hurricane Irene gathered momentum just off the coast of the Southeastern United States. Congress was away. The President in the Vineyard…Ghaddafi’s regime haltingly coming to an end. That was it. Even Republican Presidential Hopefuls were quiet. So, it was no wonder then, that the vast media beast that is this country’s network news machines lept upon this storm and proclaimed doom for 65 million people.
New York City closed down its Mass Transit System. The PGA-Fedex Playoffs quit after 54 holes and the Northeast braced for terror, rape and pillage as the dark 80-mile wide, marauding “Irene” raged unrelentingly forward at 15 miles per hour. Team Coverage stood ready in all major markets intent on prized, exclusive footage of some tragedy as it unfurled, shockingly “right before our eyes”.
And what happened?
There was a storm. Trees came down. Flash floods in spots where it always floods when there’s heavy wind and rain. High winds knocked power out, as they usually do. A tired, old, hot road that most likely should have been shored up years ago, gave way in 5 places – when was the last time anyone did anything to reinforce Highway 12 in North Carolina? A newish million dollar mansion, built too close to the water, was washed away… while the grand ladies (filmed in projects like ‘The Nights at Rodanthe’) remain resolute, watching all in stoic stature, impervious.
Yes, some towns have experienced losses… but was it the devastation of Japan’s recent tsunami, as the media hype led us to expect?
This is why I have long warned investors to be wary of constant media coverage, one day up, one day down. The massive machine that is the US news media is a voracious beast that needs constant feeding, and they will overstate stories in order to snag higher ratings and seem more important. We need to always take the long view. We especially need to take note that non-stop SHOUTING by the press–this weekend it was the weather press–will be an INSTANT tip off that they are employing emotion rather than intellect. Turn the TV/radio/press off when it sways from strictly fact-based reporting (there isn’t much of that anymore unfortunately) to veins-popping-emotional-hype.
Keep in mind the words of Forbes magazine publisher, Steven Forbes –
“You make more money selling advice than following it. It’s one of the things we count on in the magazine business – along with the short memory of our readers.”
(while he addressed the Anderson School at UCLA, on April 15, 2003.)
There’s nothing that beats a balanced approach to life; and this same balance is vital in your investment portfolio. You do not want to follow Edgar Casey and be all in T-bills, you do not want to be all in CDs (like so many of our parents and grandparents who survived world wars and lived in a very different time.) You need to match the investment instrument to the need you have for money… in other words, you need a plan; a carefully crafted plan. A plan that you stick to, whether it rains or the wind blows or whatever else the media claim is the Disaster Du Jour!
Who Else Needs A Dictionary Financial Investment Terms?
Dictionary of USEFUL Financial Investment Terms
“Just explain the useful financial investment terms, the ones I’ll use every day and I’ll be happy!”
Kim McGrigg, when she appeared on my Women and Money This Week podcast on Financial Literacy, spoke of the overwhelm and confusion so many women feel around money, investment, the markets, etc.
Women are right to be confused and overwhelmed. It’s a HUGE field that many take years to study; some a lifetime even. I’ve been a certified financial planner for 33 years and counting and I can tel you this is a vast landscape of options and alternatives. But like anything else, when you break it down into bite-sized pieces, and take it one step at a time, understanding how financial investment works becomes understandable and straightforward.
To get everyone started, I put together a dictionary of useful financial investment terms. I wanted to distill the vast amount of information out there into one small volume of just the terms most people use every day. It’s a mere $2.99 at Amazon.com and is formatted for the Kindle. This way, you can have it on your phone, on your eReader, available to hand whenever you need it.
Every field has its own jargon, its terms. In Financial Investing, we have a plethora of terms and then all the market jargon you hear on CNBC. Don’t worry about those guys and their made up stuff. This dictionary is all you need to know when you’re investing, whether as a beginner or a seasoned pro!
If you would prefer a paper version, please contact us directly, or leave word in the Comments section below and we’ll get a copy over to you.
DeMystifying Roth IRA Conversions
It may not be the sexiest topic in the world, but it sure is one sweet way to save money and avoid – not evade – taxes!! And for generations to come!
Elizabeth Warren Granted POWER!
I have awaited President Obama’s choice to head the Consumer Financial Protection Agency for months now, and am overjoyed that Elizabeth Warren will now head it. After all, she has been involved in the creation and continuous work of this agency from the start, yet to now have a proverbial `gun in her holster’ is surely what we need to really begin to unwind the errantness of Wall Street’s greedy ways.
As I blogged last October, a Harvard Law School professor, Elizabeth has a clear command of the history of financial regulations and now is poised to actually speak out and design “fixes”.
Yes, she’s a consumer advocate, yes she’s articulate, and yes, she’s serious about results. Hope has been restored to many of us seasoned financial advisers and to many American women and men, principally those retired women and men with little time to make up their lost financial ground.
My hat’s off to Elizabeth Warren, and the President for appointing her–against the wishes of many of his supporters and certainly status quo seeking financiers.
It’s a new day…and a bright one indeed!
Make it a great weekend,
Ms. Morrison
