S&P 500 benchmark: Is the S&P 500 a good benchmark for your managed accounts programs? For many years this index has been considered to be a good measure of the behavior of the broad market because it contains many more stocks than the thirty in the Dow Jones Industrial Average and because the market capitalization of those stocks was well more than half of the total of all publicly traded U.S. stocks. That is still true, but the index has become concentrated in relatively few stocks. The largest capitalization stocks are a considerably larger percentage of the weight of the index than they used to be. Because these stocks, such as Microsoft, General Electric, Intel and Dell, have attained their largest capitalizations by strong price rises, the gains in the index have masked the behavior of the majority of the stocks in the index. In 1998, far more S&P 500 stocks went down than up. The hefty gains in the index resulted from the performance of the top 35 or so stocks. This behavior has continued to a lesser extent this year. In a real sense, the index is now a high-capitalization, growth stock index rather than a measure of the broad market.
Does that mean that I should no longer use it as a benchmark for my managed accounts programs? I have mixed feelings because it is possible for an investor to buy the S&P using "spiders" or mutual funds. Also, it is not obvious what a better benchmark would be. One possibility is the Wilshire 5000 Index that is the total value of all publicly traded U.S. stocks (and contains more than 5000 of them). There are mutual funds, such as the Vanguard Total Market Index fund, that will track the entire market to some extent. However, I don't see why this would be an obviously better benchmark since most investors don't want to own the entire market, which is heavily influenced by the performance of the largest capitalization stocks in any case. (The best vehicle for investors who want a "market return" is an interesting topic in and of itself.)
Government regulations require that I report the returns on my programs in the context of the overall market, which means I need some benchmark for comparison. Due to the popularity of the S&P and the availability funds that track it, I am going to stick with the S&P 500 or the Vanguard Index 500 fund as benchmarks.
Rather than doing simple comparisons to any benchmark or index, you should keep your long-term investment objectives and your expectations in mind when evaluating any investment returns. I do not think it is a good idea to compare particular investment returns to any benchmark or other returns without evaluating one's entire financial position. Otherwise, one might change investment strategies-possibly investing only in index funds-without giving full consideration to the advantages, disadvantages, and risks associated with the new strategy. Such actions may result in an inappropriate mix of investments.