Investors use benchmark indices to compare the performance of their investment portfolios over time. Different indices are used for stocks, bonds, and commodities, with popular indices including the S&P 500, Dow Jones Industrial Average, and Lehman Brothers Aggregate Bond Index. Mutual funds can mimic these indices.
A benchmark is a standard reference point used to compare the results of similar investments over time. Investors can use a benchmark to analyze the returns of an individual or institutional investment portfolio. Different indices can be used to measure portfolio returns for stocks, bonds, and commodities.
A common stock index is the S&P 500. Investors can compare the gains of stocks in the S&P 500 index with the gains of stocks in their own portfolios. This index tracks the performance of 500 shares of large-cap companies that are actively traded in the United States. In general, a stock investor’s goal is to have a portfolio outperform or outperform the S&P 500 stock index. The Russell 2000 Index is another stock index that tracks 2,000 small-cap stocks in the United States.
The Dow Jones Industrial Average is another benchmark that investors often use to measure the performance of their investment portfolio. This tracks the earnings of 30 stocks that are widely held by individual and institutional investors. The companies included in the Dow Jones Industrial Average are generally the largest and most prominent companies in the United States. According to the Dow Jones website, the Dow Jones Industrial Average is the most cited benchmark in newspapers, on television, and on the Internet.
Bond investors also use benchmark indices to review their results. The Lehman Brothers Aggregate Bond Index is a popular bond benchmark index. This includes fixed rate investment rate bonds. The types of bonds included in the Lehman Brother Aggregate Bond Index include Treasury, government, mortgage and corporate bonds.
There are also indices available that focus on stocks in specific industries. These can provide insight into how a general sector of the market is performing. Industries that are commonly tracked separately by various indices include transportation, utilities, and retail.
Commodity investors also use indices to measure their results. The S&P GSCI Index tracks 24 different commodity prices. These materials include oil, natural gas, livestock, sugar, coffee, and other widely used raw materials.
Benchmark indices have a long history in the United States. The S&P 500 started in 1957. The Dow Jones Industrial Average, created in 1896, is now over 100 years old. With its debut in 1986, the Lehman Brothers Aggregate Bond Index is relatively new. Although investors cannot directly invest in an index, many financial institutions have created mutual funds that mimic indexes. For example, an investor might buy shares in a mutual fund that contains only S&P 500 shares.
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