When that 401k statement arrives in the mail, do you look at it with frustration? Many of us do. The market is in a constant state of flux and watching a long term investment like a retirement account can be confusing. How do you know if your portfolio is performing up to par? One month it is up, and then in six months it drops. Should you change your mix? Leave it alone?
Most financial advisers recommend not looking at market fluctuations of long term investments too often. The short term ups and downs of the market will only worry you needlessly. A more important measure is how these investments perform over a five year plan. But, even then, many of us are still unsure of how to evaluate them.
A good measuring tool for the average retirement account holder is a market index. Indexes track the performance of a group of securities. Therefore, they are useful as benchmarks for your retirement accounts. There are different types of indexes. Let me share a few with you to use for your record keeping.
Standard & Poor’s 500 Index (S&P 500)
This is a very popular index as it tracks the performance of large United States companies. Due to the volume of these businesses, their market value makes up 75% of the total of all U.S. equities.
Russell 2000 Index
This index actually weighs different sections of the market differently. Therefore it is often used as an indicator of how smaller businesses are performing. If your portfolio contains many small-cap U.S. stocks, this is definitely an index to follow.
Lehman Brothers U.S. Aggregate Index (Lehman Agg)
This is actually a specific index for bonds. So, it is a good one to check if you own a lot of bond funds. Due to the variety of bonds this index tracks, it is also a good for measuring overall interest rates.
Morgan Stanley Capital International EAFE Index (MSCI EAFE)
The EAFE represents Europe, Australasia, and the Far East, so this index is particularly useful to evaluate foreign stocks and markets. Due to this, it is the most commonly used indicator of how international stocks perform.