Is the S&P 500 the best investing benchmark?
For many investors, the S&P 500 might not be the most accurate benchmark for their portfolio. Let’s find out why.
The S&P 500 is an index commonly used by analysts and investors to track the health of the stock market and the general economy. But should you compare your portfolio’s performance to the S&P 500? Here are a few reasons why it may not be the best benchmark.
What to remember: The S&P 500 index only includes the leading companies in the United States. If you have a diversiﬁed portfolio across global markets and industries, the S&P 500 is not an apples-to-apples comparison.
Fast facts: Here are a few things to know about the S&P 500 and the global stock market when considering using an index as a benchmark.
- The S&P 500 index was launched in 1957 by the credit rating agency Standard and Poor's.
- The SEC lists six major stock market indexes on their website and there are dozens of indexes used across the world.
- The S&P 500 index includes 500 leading U.S. companies, representing only about 80% of the U.S. stock market and only about 42% of the global stock market. Additionally, the index is weighted by ﬂoat-adjusted market capitalization which means that larger companies end up being a larger portion of the index, making it less of an apples-to-apples comparison for the global market.
- Economists at Goldman Sachs predict that emerging markets will grow at a faster rate than U.S. equities, making the S&P 500 even less of a global index than it is today.
What’s the best index to use as a benchmark? It depends. To know which index to compare your portfolio to, you need to ask, “Which markets am I invested in?”
- Many Betterment portfolios are globally-diversiﬁed, making the MSCI All Country World Index (ACWI) a better benchmark than the S&P 500.
- The ACWI covers 47 global markets in both developed and emerging economies, representing 99% of the investable global equity market.
It’s about your goals: It’s also important to remember that benchmark indexes are not designed with your goals in mind.
- Your personal portfolio at Betterment is meant to meet your goals, not track a general benchmark.
- As you invest with us, your asset allocation may change to protect your wealth and keep your investments in line with your risk appetite.
Next time you see a news article reporting on recent movements of the S&P 500 you can relax knowing that your portfolio is designed for your goals, not the index’s.