The Index Factor
/Occasionally, it’s worth reviewing the basics to keep market volatility in perspective. Dow Jones Industrial Average (DJIA) and Standard & Poor’s 500 (S&P) are indices most familiar to investors due to the constant reporting by the news. Investors want to know how movement of an index affects their portfolio, and I say, “not much.” For example, on March 31, 2018 the DJIA closed at 24,103, a 300-point loss or gain would have only impacted the index by 1.24%.
These indices are not apples-to-apples comparisons of your individual portfolio. Both are comprised of large publicly-traded U.S. companies. The DJIA is made up of 30 stocks and the S&P, 500 stocks. Is that reflective of your portfolio? Not if you have a well-diversified portfolio with large, mid and small cap stocks (both domestic and international) as well as global bonds and cash.
The impact of these indices to your portfolio narrows when you take into consideration that the DJIA is price-weighted and the S&P 500 index is market-cap weighted. For the DJIA this means that Boeing (trading at $352/share) is moving the index considerably more than General Motors (trading at $14/share). The S&P 500 considers that total value of the company (share price multiplied by the number-of-shares-outstanding) which is more reflective of the stock market. Therefore, when you hear the stock market report each day, it is important to remember what makes up each of these indices. Your globally-diversified portfolio includes many other types of investments, so movement in the DJIA or S&P 500 is not going to translate into proportionate movement in your portfolio. In fact, depending on what happened with your other investments, the direction of your portfolio may not have moved in the same direction – an index may have gone down, but your portfolio went up.
- Bonnie Struck, CMFC®, Worley Erhart-Graves Financial Advisors
