From
Your Perspective:
Managing your 401(k) portfolio
Using benchmarks
Another way to evaluate your investments’ performance is by
comparing their returns with those of appropriate
benchmarks.
A
benchmark is an
index
or average that tracks the day-to-day price changes in a particular
investment category, or in the overall stock or bond market.
For example, the
Standard
& Poor’s 500-stock Index
(S&P 500)
and the
Dow
Jones Industrial Average (DJIA)
are the most widely followed
benchmarks of the U.S. stock market. The S&P 500 follows the
performance of 500 widely held large capitalization companies
and the DJIA includes 30 large capitalization companies.
A benchmark is considered an appropriate
measure of performance when the investments it follows are similar
to those you’re evaluating. For example, the S&P 500
is an appropriate index for a
large-cap stock
fund, but not for
a
small-cap stock
fund. In that case, you’d want to use
the Russell 2000 Index, which tracks the performance of 2000 small-capitalization
U.S. companies.
There are dozens of indexes and averages, each
tracking a different aspect of the market, that can help you track
your retirement portfolio’s performance. If your investments
don’t measure up to their appropriate benchmarks for an
extended period of time, you’ll know to reallocate your
portfolio so that it’s more in line with your original expectations.
Don’t act too quickly if you notice your investments lagging behind their benchmarks. Remember that you’re investing for the long term, and reacting to short-term fluctuations could hurt you more than help you in the end.
