What is the "Market"? (12-21-15)
Every day we hear about the “Market” whether it is through a friend or family member mentioning what they saw on the news last night or a television or radio program talking about the state of the market. The question you need to ask is - “What is the Market?” This is one of those terms we hear every day and don’t think twice about. You could ask ten different people what the market is and get ten different answers. It’s important to understand what the market means to you to help you interpret what you see and hear and to set proper expectations for your investments.
Probably the most common “Market” you hear about is the S&P 500. Do you really know what the S&P 500 is? It’s a trading system. This trading system is created and controlled by a committee that picks 500 large U.S. company stocks ($5.3 billion or more in market capitalization) to create their index based on some rules and their own judgment. This committee then makes changes to that index (removing or adding companies) as needed. So what you end up with is a basket of 500 stocks of big U.S. companies hand chosen by a group of individuals who will change the contents of that basket as they see fit.
Now the question is - “Does this represent the Market?” Well, in the U.S. there are roughly 4,000 stocks traded on the New York Stock Exchange and the NASDAQ (which represents most of what shows up in Mutual Funds, ETFs, or directly in people’s accounts). So the S&P 500 represents only 12.5% of U.S. stocks available to trade on the U.S. stock exchanges. It is true that the S&P 500 does represent some of the largest U.S. companies, but does it serve as a proxy for judging the entire “Market”? We would argue that it does not.
In our view, the S&P 500 represents only one of many areas in the U.S. market in which you could invest. Other parts of the U.S. market ought to be considered as well such as Small and Medium size companies, Value or Growth oriented companies, and so on. You could even drill down further into sectors such as Energy or Technology. Perhaps a better proxy for the U.S. markets might be the Russell 3,000, which encompasses approximately 98% of the investable US stock market.
We encourage you to think far beyond this however. In our Model Portfolios, we include many other markets such as International stocks, Emerging Markets, U.S. and Global Real Estate, Commodities, and Bonds. All of these are markets in their own right and can provide diversification and returns to your portfolio.
So the next time you get into a discussion about the “Market”, be sure to give that question some perspective and think about what Markets matter to your investment success.
-Ed & Josh
Remember, investment success is a process, not an outcome!
For more information about our unique approach to investing, please visit our Investment Services page, and remember that we are always here to answer any questions you have about how to ensure the best future for your money.