Money Matters: What is an index?

Advice offered by Marc Hebert, president of The Harbor Group Inc., a certified financial planner. If you have any questions about finance or if you’d like to suggest a future topic, email [email protected] market’s up! The market’s down! What thoughts come to mind when you hear commentators mention the performance of “the market?” Most people equate “the market” to one of the major indexes, usually the S&P 500, the Dow Jones Industrial Average (DJIA), or the NASDAQ. But which index is the most appropriate barometer? Anyone following the stock market over the past year will attest to the fact that these indexes don’t always act the same way. While both the S&P 500 and the NASDAQ ended down for 2018, this is not always the case. Indexes can move in different directions just as often as not. What is an index’s purpose?With investments, indexes are intended to provide a benchmark against which investment performance can be measured. Let’s say you have a goal to beat a particular index and your mutual fund returned 6% over a certain period of time. While you may be happy with that return, wouldn’t it be useful to know how that compares to other investments? If, over the same period of time, a comparable index returned 9%, your return isn’t looking so good, is it? On the other hand, if the index returned minus 2%, your performance is superb. Financial returns are relative, and an index is a way to compare returns. The problem, however, is finding the appropriate benchmark so apples to apples comparisons can be made. How the indexes differ:So out of the S&P 500, the DJIA, and the NASDAQ, which index is the best benchmark? Listen to the business update of any news show and you are almost certain to hear about

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