Market Indices Help Measure Success

By Scott Culver
Communications Specialist
WEA Trust

October 2000

Some people are happy to make 7% a year on their tax-sheltered annuity (TSA) account, while others are disappointed with 15%.
The reason is different expectations. For someone using an aggressive investing strategy, a 15% return pales when others using a similar strategy earn 30%. On the other hand, a person investing conservatively and expecting to make 5% would be delighted to make 7%.

How do you tell if your investments are on par with similar alternatives? Financial professionals often use an index as a benchmark to measure the performance of an investment type, style, or market segment. In brief, an index measures how well all investments of a particular type perform.

For example, assume you want to research a mutual fund. A mutual fund pools money from many different investors to purchase stocks and bonds to pursue a specific financial goal.
Historical returns alone cannot tell you how a fund has performed. You need to compare those returns with the returns of an appropriate benchmark over the same time period.

Standard and Poor’s 500 Composite Stock Price Index, often referred to as the S&P 500, is a common benchmark. Because it is made up of large, established blue-chip stocks, the S&P 500 is a good benchmark for mutual funds. You may find, for example, that while your fund has gone up 22%, the S&P 500 has increased 27% in the same time period.

However, comparing other investments to the S&P 500 could produce misleading results. For example, if you have a portfolio of small-company stocks, you might want to compare it to the Russell 2000, which is an index made up of about 2,000 small-company stocks.

For those who prefer to invest in socially responsible companies or funds, the Domini Social Index is a useful benchmark. It tracks 400 companies with a strong record on social and ethical issues and tries to avoid companies with significant revenues from alcohol, tobacco, and gambling.

An index may also cover specific industries, such as the Lipper Natural Resource Index, which tracks companies in such areas as natural gas, oil, pulp, and base metals.

To assess your fund’s performance, focus on the benchmark used for comparison in your fund’s prospectus. Be sure to compare total returns over identical periods.

For more information on benchmarks, call a Trust retirement consultant at (800) 279-4030.