The Importance of Understanding a Stock Index…
This concept is more important than ever, so I wanted to update this post I wrote a few years back, and make a video showing you how easy it is to look up the performance of the s&p500 stock index.
Do you ever miss the forest for the trees? I do this a lot.
For example, I will plan on cleaning out my email in box in half an hour and I will end up focusing the entire time on one email response that is time intensive. Similarly, it is easy to get caught up in learning the smaller aspects of investing instead of first focusing on the forest, or the big picture.
The concept of stock index investing is a perfect example of a forest concept that every investor must grasp and here’s why: Once you understand the concept of an index, first, you have the ability to measure performance, and second, you can invest your own money if you choose.
A stock index is one of the most important concepts for a financial woman to understand. Here’s why:
- If you have a stock fund that is an actively managed U.S. stock fund, meaning that you have a fund manager buying and selling stock in your investment account, then that fund should perform better than the s&p500 index.
- If you are working toward a financial goal, then you can use the past performance as a rough guide to what your estimated investment returns might be. Huge warning: This only works over very long periods of time, such as 20 plus years, however, and it depends on when you buy into the market. (Remember, my golden shopping rule: Always buy smart, whether it’s a purse, a stock fund, or a home!)
- Indexes are a way for individual investors to get diversification at a low cost. Even many financial advisors use index investing for their clients.
- Index investing is simple and available for any level of wealth.
- As shown in my video below, you can use an index as a smart shopping comparison and evaluation tool for all of your investments.
And only by investing, actually measuring the performance of your investments can you evaluate your decisions. This evaluation leads you to smarter actions because we all learn from our lessons and make better decisions moving forward. Becoming a better investor is a process. (My goal is to shorten that process by sharing what I have learned from over 30 years of investing myself:)
If you missed my other articles on stock indexes (also called indices), you may be wondering what a stock index is. It’s simply a basket, or group of stocks that represents all or part of a market, such as the U.S. stock market, or the bond market.
Think of an index like your wardrobe, which is made up of many different items, such as blouses, dresses, tops and belts. The term wardrobe represents all of the things that you wear, and it broadly defines your clothes.
In the same way, a stock index, such as the S&P 500, is made up of stocks that represent the US stock market, including favorites such as Tiffany & Co., Apple, and Coach.
Keep this simple yet super important big picture concept in mind as you learn more about investing. You will see and hear it time and time again once you start focusing on investing.
Below I’ll show you below how easy it is to use an index to see how well the overall stock market in the United States is doing, and how well it has done in the past. This simple process immediately gives you valuable information to compare how well your related fund is doing relative to the overall stock market, as explained above.
In this video, you’ll see how to use Morningstar, a free (as used here) online investing resource where you can look up most stock indexes, or in this example, the s&p500 index fund. You’ll remember, this is an index that represents the overall stock market for large companies in the United States. As you can see from my video, the 10-year chart will show you how the s&p500 has performed over a 10 year time period.
If you look at how an investment has done in the past, while it does not repeat itself exactly, as we all know, over long periods of time, it tends to repeat the pattern.
In summary, you can use the index as a way to invest and information about the index for evaluation. The s&p500 is the most common index used to represent the US stock market, so it’s a valuable tool for savvy investors.
Want to learn more about how to invest? Learn how you can by clicking here.
Updated: October 2016