The Dow Hit a Milestone, but has Your Portfolio?

The Dow reached the 13,000 milestone at the end of February which garnered considerable headlines.  The index was only 8.4% off from its all time high in October of 2007.  While this index is much talked about and cited, is it the right metric to measure the performance of the U.S. equity market or to compare against your portfolio?

The Dow Jones Industrials Average is a measure of 30 of the largest companies in the U.S. predominately in only 6 of the 12 sectors in the stock market.  It is an index of mega cap firms that is price weighted so that the companies that have the highest share price, and not necessarily the largest market capitalization, have the largest affect on the index. 

As the index consists of such large firms and with such a small sample size it does not provide a complete view of how the market is performing.  The S&P 500, however, is an index of 500 large publicly traded companies in the U.S.  It is market capitalization weighted so the largest companies, not those with the highest stock price, receive the highest weighting.  Unlike the Dow, it is specifically designed to cover all sectors of the market.  Given its broader scope and greater number of holdings, the index provides a better gauge to see how the U.S. equity market is performing. 

However, for an even more accurate measurement of the U.S. equity market, the Russell 3000 index is ideal.  While the S&P 500 covers just large cap companies, the Russell 3000 covers all sectors of the stock market, large, mid, and small cap companies, and with its 3,000 holdings, includes 98% of the investable U.S. market.  Thus, for the most complete view on the U.S. stock market’s performance a broader benchmark like the Russell 3000 should be used.

All of the above benchmarks look strictly at the U.S stock market; however a typical investor’s well diversified portfolio covers international equity and fixed income as well.  This makes comparing your portfolio to a U.S. equity benchmark apples and oranges.  Over 2011 the Dow returned 5.5% compared to 1.0% for the Russell 3000, and -13.6% for international equity.  Thus, a diversified equity portfolio would have fallen short of the Dow as large cap U.S. equity was the top performing asset class.  However, in 2012 the script has flipped as the Dow has returned 6.6%, while the Russell 3000 has gained 9.5%, and international equity is up 13.1%.

While the Dow is popular with the press, it clearly does not provide an accurate picture of the total equity market.  When reviewing your portfolio performance it’s important to compare it to a benchmark that reflects the asset allocation of your portfolio.  By comparing apples to apples you will be able to determine if your portfolio is delivering the returns that are expected.

Index Performance                                       February       Trailing 1 Yr       

US Stock (Russell 3000)                                     +4.23%             +4.45%        
Foreign Stock (FTSE AW ex US)                        +5.67%             -5.53%        
Total US Bond Mkt. (BarCap Aggregate)          -0.02%              +8.37%         
Short US Gov. Bonds (BarCap Gov 1-5 Yr)       -0.27%              +3.18%       
Municipal Bonds (BarCap 1-10yr Muni)            +0.10%             +8.03%        
Cash (ML 3Month T-Bill)                                    +0.00%             +0.08%

There is no guarantee that any investment strategy, including those described here, will be successful. Any investment or investment strategy can lose money. Past performance does not guarantee or predict future results. You should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Raffa Wealth Management, LLC. This information was gathered from reliable sources but we cannot guarantee accuracy. Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.
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