Indexing is Like your Wardrobe

Recently I have been writing about an important term for financial women; stock market indexes. Before you convince yourself this is just another boring topic, let’s take a look at why indexes are important and how they are similar to wardrobes. Indexes measure the performance of almost every traditional investment, so they have to be important.

An expansion of this statement is for another day, but for now, trust me, indexes help you evaluate the results you are getting form your investments. Measuring performance lets you know if you are accomplishing your financial goals. Having financial goals and a plan to reach them leads to financial security, the ultimate goal of investing.

As you may recall, an index is simply a group of stocks that represents a segment of a market. I used the analogy of your clothes having many different elements, with the totality of those parts representing your wardrobe. Now I want to expand on the concept of market indexes a little more.

I like clothes, so the analogy I want to use relates to shoes this time. Your shoe wardrobe consists of all of your shoes, which likely includes dressy shoes, such as high heels, tennis shoes, sandals, and perhaps some boots. Each of these shoes represents the totality of your shoe wardrobe. In the same way, a retail index is made up of different types of companies in the retail business, including some of my favorites such as Costco, Talbot’s, and Williams Sonoma. Your shoe wardrobe is a like a sector of your total wardrobe, just like a sector index represents a small part of a larger market.

Market indexes can be large or small. An index can stand for an entire market, such as the S&P 500 index, which represents a very large part of the U.S. Stock market. A smaller index could represent a lesser segment or sector of the U.S. market, such as only companies that are in the retail business, or companies that are in the technology business.

Now you know and understand what a sector index is. Indexes are super important because they are used as a measure for the performance of almost every traditional investment. Performance measurement tells you whether you are on track to get where you want to go. This is what investing is all about, since getting where you want to go is ultimately financial security.

This information is for educational use only and is not financial advice.

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