The S&P is up 7% thus far for the year as I type this post for Financial Woman. If it were December, that return may seem pretty boring, but in early February, that number sounds rather remarkable. However, shorter term monthly returns are not the point that I want to make in this article, especially since that number will probably change by the time you read this. Instead, I want to focus on the more important notion of what the S&P being up 7% really means; this is a super important concept for anyone wishing to grow their money and reach their financial goals.
The S&P, one of several indexes that broadly represent the U.S.stock market, stands for the Standard & Poor’s 500 index. This index is made up of 500 large U.S. based companies that have common stocks that are publicly traded in the stock market. The word broadly is investing lingo for generally. I like clothes, so to relate this to an example, the term wardrobe represents most of the things you wear, such as your shoes, tops, and blouses.
You may say that your wardrobe is old, or casual. You probably still have a few pieces that are new, or dressy, but, in general, you have described the state of your wardrobe. This gives us an idea about the totality of your wardrobe. In the same way, an index can be used to describe how an overall market has performed. If the stock index has risen for a given time period, we know that in general, the stock market has risen during that time, even though some stocks have gone down while others may have risen in value.
You can see how important the stock index concept is for several reasons.
First, and most importantly, indexes can easily measure the performance of an investment in almost any type of financial product or service.
Second, the longer term performance of stock indexes can be used as a way to measure against other investment opportunities, such as investing in real estate or small business.
Third, a common investment plan used by both financial advisors and individual investors is to construct a simple index portfolio that is both low cost and tax efficient, but overall consistently outperforms actively managed funds.
Indexes are one of the most common concepts when it comes to investing, and investing is about growing your money so that you can reach your financial goals. Gain a clear understanding of this very simple but important investment tool so you can be a confident and proactive leader of your money.