“A man’s behavior is the index of the man, and his discourse is the index of his understanding.”

Ali said that. No, not the one who stood over Sonny Liston in the ring which was captured in the most prolific boxing photo of all time.

This was Ali Talib, a historical figure in Islam and the son-in-law of the prophet Muhammed.

What does he have to do with your finances? Nothing really, but I like the quote, and it
serves as a nice segue into a primer on financial indexes.

In a volatile market, it’s impossible to escape the onslaught of minute-by-minute updates on television and the web.

And invariably those screen graphics show several indexes and their current performance — the S&P 500, Dow, and Nasdaq are most often shown.

And it’s easy to take a quick look at these graphics and make an immediate determination about how your investments are doing at that particular time. And that, in turn, may influence your mood/emotions.

Before that happens, it’s useful to know what these indexes actually represent and how it may or may not be related to your investments.

The Dow Jones Industrial Average is an index that tracks just 30 large, publicly owned blue-chip companies trading on the New York Stock Exchange and Nasdaq.

Stocks with higher share prices are given greater weight in the index (price-weighted methodology).

Companies in the Dow include American Express, Coca-Cola, IBM, McDonalds, Microsoft, Disney – you get the idea.

The Nasdaq Composite Index is an index of more than 3700 stocks with a heavy weight on the technology sector.

This index uses a market capitalization-weighted method which refers to the total dollar market value of a company’s outstanding shares of stock.

The tech sector accounts for over half the Nasdaq index, more than three times the weight of any other market sector. Five mega-cap companies account for more than 40% of the index’s weight, led by, you guessed it, Apple.

The Standard & Poor’s 500 Index (S&P) is also a market capitalization-weighted index comprised of 500 leading publicly traded companies in the U.S.

In comparison with the two indexes mentioned previously, it is a better barometer of how U.S. equities are currently performing as it’s a much larger sampling than the Dow and does not have as much of a tech weight as the Nasdaq.

Yet, it is highly probable that none of these indexes are an exact match to your portfolio and the screenshot of that moment’s performance is not going to tell you how your investments are faring for several reasons – assuming of course that your portfolio is diversified.

A well-diversified portfolio is going to have exposure to different investments and sectors such as non-US developed markets (i.e., Western Europe, UK, Japan); emerging markets (i.e., Vietnam, India, Pakistan); small cap companies (smaller, up and comers); precious metals, foreign and municipal bonds. These examples are not exhaustive.

The above-mentioned indexes, the ones you most commonly see on the ticker, are not going to tell you the story of a portfolio that is comprised of all these different investments, designed and allocated to your stage in life and your risk tolerance.

They simply tell a moment in time picture of the specific investments contained in that specific index.

So, as you pass by the television or look at your phone and see the current state of the markets – take a step back and a deep breath. It’s not the whole picture.

Original content provided by
Gregory Mattacola, Esq., CFP®,
Lead Advisor at Strategic Financial Services. Content is provided for educational purposes only and should not be used as the basis upon which to make an investment or financial decisions.

Investments involve risk and, unless otherwise stated, performance is not guaranteed. Past performance is not indicative of future performance.