Broker Check

Investment Performance: Compared to What?

| July 11, 2018
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With daily market fluctuations, it is not always easy to understand how well your investments are doing. One way to determine performance is to evaluate your investments objectively using industry-standard performance benchmarks. A benchmark is a market index or average that allows you to compare the performance of your stocks, bonds, and mutual funds against similar investments. Here are some of the most well-known and widely used investment benchmarks: 

Stock Benchmarks 

Dow Jones Industrial Average (DJIA). The oldest and most widely quoted market indicator. The DJIA reflects the price-weighted average of 30 actively traded blue-chip stocks. (Price-weighted indexes give greater weight to higher priced stocks over lower priced issues.) Historically, the DJIA mainly consisted of industrial stocks from the New York Stock Exchange (NYSE). Today, technology stocks such as Microsoft, which lists on the NASDAQ (National Association of Securities Dealers Automated Quotations) system, now occupy an important place in this index. 

New York Stock Exchange (NYSE) Composite Index. A market value-weighted index that compares the current market value of all NYSE stocks to their aggregate value as of December 31, 1965, adjusted for changes in company size. 

Standard & Poor’s 500 Index (S&P 500). A market value-weighted index that reflects changes in the aggregate market value of 500 stocks compared to the base period of 1941–1943. The S&P 500 consists mainly of NYSE industrials, although it also includes transportation, utility, and financial stocks traded on the American Stock Exchange (AMEX), as well as over-the-counter (OTC) issues. 

Bond Benchmarks 

Moody’s Investors Service. One of the two better known bond rating agencies in the country. Moody’s rates publicly held corporate and municipal bonds, as well as many Treasury and government agency issues. It provides investors with substantial details on the issuers and the securities. 

Standard & Poor’s. The other well-known bond rating agency. Standard & Poor’s classifies bonds (and stocks) into a number of grades according to risk. These are further grouped into two broad categories: investment grade, and speculative, in which institutions with fiduciary responsibility are not allowed to invest. 

Mutual Fund Benchmarks 

Indexes. Mutual fund indexes exist for different types of funds. For example, the Value Line Index covers aggressive growth funds; the Russell 2000 Index applies to small capitalization stocks; and various indexes cover government, corporate, and municipal bonds. 

Investment Advisory Service Rankings. Morningstar is an independent mutual fund rating and analysis service that measures risk and compares the long-term performance of thousands of mutual funds. It uses a star system to rate performance based on a fund’s risk and on how it performed compared to other funds in its investment category. The Value Line Mutual Fund Survey and Lipper Mutual Fund Rankings also rate mutual funds. 

Peer Group Rankings. Mutual fund peer groups rank the performance of funds with similar asset classes, risk levels, and investment objectives. Funds are generally grouped according to their investment goals. Each fund is then ranked according to specific criteria, such as risk, risk-adjusted return, or five-year total return. The top 20% receive the rank of “1,” while the bottom 20% are ranked as “5.” 

Published Rankings. Many business magazines, newspapers, and newsletters, such as Forbes, Fortune, Business Week, SmartMoney, and Money periodically analyze individual funds and publish their respective rankings. 

Industry standard benchmarks provide a means for comparing the performance of your investments to the market. Past performance is not indicative of future results, and investors cannot invest directly in an index. Once you become familiar with the appropriate indexes and rankings, you may better handle understand how your investments are doing and decide if now is the time for a new investment strategy.

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