What do investment benchmarks and the MN State Fair have in common?
An investment benchmark is a way of comparing how your portfolio is performing. But what does that mean exactly?
I love going to the Minnesota State Fair every year at the end of August. I enjoy walking around and checking out the home project displays, the animal birthing barn and more. But, admittedly, my favorite part is the food. Like many people who go, I have my regulars – corn on the cob and deep-fried cheese curds always make the list. But the very last thing we do, is stop at one of the Sweet Martha's booths to buy a bucket of chocolate chip cookies. It’s overflowing with these warm, tasty little gems and along with a glass of cold milk, we eat until we can get the cover on the bucket. Then we head to where the buses are all lined up and hop on ours to get back to our car and drive home. It’s a fun excursion.
The rest of the year, anytime I have a chocolate chip cookie, I compare it to the Sweet Martha's cookies I get at the fair. That is my standard, my benchmark. Now when I’m eating a blueberry muffin, I don’t use Sweet Martha's cookies as the comparison. That wouldn’t really make sense would it? The benchmark you use to understand how your portfolio is performing is similar. It needs to be the “right” benchmark. Not just “any” benchmark. And it should be used consistently over time. It's easy to find a benchmark that tells the story you want it to tell. But there should be a good reason for switching to a different standard.
There are a multitude of investment benchmarks that are available. These usually come in the form of an index. The Dow Jones Industrial Average (DJIA), referred to as the "Dow", is a common index made up of 30 blue chip stocks, primarily large, healthy companies. It is often used as a gauge of the health of the market. On the news you will hear reporters say, “The market was up 20 points today.” And they are typically referring to the Dow, even though it is only 30 companies. The Standard & Poor’s 500 Index (S&P 500), referred to as the "S&P" is made up of 500 large companies headquartered in the United States, making up about 80% of the domestic equity market.
One of the exercises I have my clients do is choose one stock, one company, they want to follow. I'd like to have you do this same exercise. There may be a sentimental reason for the stock choice. Maybe your Grandfather worked at a company his entire career and you inherited some of that stock. Or you have a favorite store you shop at on a regular basis. Whatever the reason, choose just one to follow. Add the “Stock” app, “Yahoo Finance” app or something similar on your phone so you can easily monitor how your stock is doing. You will need to find the ticker symbol for that company so you can add it to the list of companies you want to follow. If you start typing in the name, different ticker symbols will start to present themselves. You may have to do a little research to figure out the correct one. It will also need to be a publicly traded company, or one that you can buy and sell on one of the stock exchanges. It cannot be a privately held stock that is not traded in a way that you can easily follow the value of the company.
There are many more indexes, but these are two of the more common ones you will hear referred to in the news and used by Financial Advisors/Planners. What I would like to have you do is write down the current value of the Dow and the S&P, as well as the market value of the one stock you have selected. Every two weeks write down the new values. Start to pay attention to what’s happening in the economy and in the headline news. How does this affect the Dow and the S&P? How does this impact your stock? It’s not always intuitive. There are times it makes no sense whatsoever. You expect one reaction and get something different. The market does not like uncertainty, so it will react to ambiguity. It may have anticipated a certain outcome so that has already been baked into the value when an event actually takes place. It's all part of the challenge and why the market is unpredictable. The playing field is leveled because nobody has a crystal ball. The only perfect view is 2020 hindsight!
I think you'll be surprised by what you learn, just by paying closer attention to the relationship between what's going on in the world and what happens in the stock market. And tracking one company that has some meaning to you makes it a little more fun. Consider how you would feel, when your stock goes up or down, if you had purchased this company. This could help you start to understand your risk tolerance. None of us like to lose money, but keep watching it for the long haul and see what happens. You might be surprised by what you learn!
To understand a stock quote go to: https://www.investopedia.com/articles/investing/093014/stock-quotes-explained.asp
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