Investors use benchmarks to evaluate the performance of individual investments and groups or portfolios of investments. Commonly used benchmarks in the United States include indexes that measure various investments and sections of the markets. Indexes that measure both broad market and specific segments are regularly used to assess and modify portfolios on an ongoing basis.
Although investors watch the numbers daily during trading hours, the Dow Jones Industrial Average, or DJIA, because of the limited number of companies represented, does not accurately measure the market as a whole. Conversely, should the investor own only the stocks represented in the Dow, the index would be a perfect benchmark. Just as with any index, it is important to know the constituents that make up the group being monitored. Of course, there are global and stock sector indexes and indexes that track only bonds issued in one nation. However, there are certain common benchmarks used regularly by U.S. investors to measure the performance of investments.
S&P: U.S. Large-Cap Stocks
Investors, financial advisers, advertisements for new investments and others often make note that a particular stock investment "beat the S&P" or "lagged behind the S&P." Referring to the Standard & Poor's 500, this index has long been a benchmark for all types of investments. Specifically, the S&P 500 measures large-cap stocks based in the United States. According to Standard & Poor's criteria, companies included in this index must maintain a market cap in excess of $4 billion, consistently report positive earnings and meet additional criteria to remain a part of the index.
Russell 2000: U.S. Small-Cap Stocks
A commonly used benchmark to measure the performance of U.S. small-cap stocks is the Russell 2000 Index. Maintained by Russell Investments, the constituents in this index are evaluated each year. If a company grows beyond the small-capitalization categorization, the stock is removed and replaced to maintain the integrity of accurate small-cap measurement.
Wilshire 5000: U.S. Broad Market; MSCI EAFE: Global Stocks
The Wilshire 5000 measures stock performance on an extensive scale. This index is a commonly used benchmark of the U.S. broad market. Morgan Stanley's EAFE, known simply as the MSCI EAFE, measures the performance of global stocks collectively. This benchmark is used to gauge the performance of portfolios made up of international equities and global stock funds.
Bond indexes must account for changes in the group monitored as issues mature and are replaced. The most often used benchmark to evaluate the performance of the U.S. bond market is the Barclays Capital U.S. Aggregate Bond Index. This index is used to gauge both individual bonds and bond funds. Older investors may still refer to the index by its name up until 2008, the Lehman Brothers Aggregate Index.
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