Investment Performance—Compared to What?
Against the background of daily market fluctuations, it is not always easy to
understand how well your investments are truly 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; 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 more than 2,000 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 selected 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, 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 will have a
better handle on how your investments are doing and if now is the time
for a new investment strategy.
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