Commentary by Adam Cmejla
The S&P 500 finished with an 11.39 percent gain in 2014. Why didn’t I fare the same? If your investments are lagging the broad benchmark, you may be asking that very question. The short answer is that the S&P is not the overall market (and vice versa).
Keep in mind that the S&P serves as a kind of “Wall Street shorthand.” The media watches it constantly because it can provide a good gauge of how things are going during a trading day, week or year. It is cap-weighted (larger firms account for a greater proportion of its value, smaller firms a smaller proportion) and includes companies from many sectors. Its 500-odd components represent roughly 70 percent of the aggregate value of the American stock markets.
Still, the S&P is not the whole stock market – just a portion of it.
You can say the same thing about the Dow Jones Industrial Average, which includes only 30 companies and isn’t cap-weighted like the S&P is. It stands for about 25 percent of U.S. stock market value, but it is devoted to the blue chips.
The Nasdaq is large (more 3,000 members) and consists of insurance, industrial, transportation and financial firms as well as tech companies. It is tech-heavy, however, and includes a number of speculative small-cap firms. So on many days, its performance may not correspond to that of the broad market.
That also holds true for the Russell, which is a vast index but represents small caps. (It is actually a portion of the Russell 3000, which also contains large-cap firms.)
If you really want a broad view of the market, your search may lead you to the Wilshire 5000, which some investors call the “total market index.” Some say that the Wilshire is the real barometer of the U.S. market, as it is several times the size of the S&P 500 (it includes about 3,700 firms at the moment, encompassing just about every publicly-traded company based in this country. The Wilshire finished up about 9.54 percent for 2014.
Also remember: one benchmark doesn’t equal the entire market.