Equity-Based Benchmarks

Investing in the stock market comes with inherent risk. The stock market has highs and lows, but how can you measure your investment portfolio’s success? One job of a financial advisor is to compare their investment strategy to a benchmark. Benchmarks provide some clarity surrounding the success or lack thereof concerning your investments. Investment Portfolios are often designed to either mirror or beat their benchmark outright in terms of performance. Essentially, benchmarks provide a measuring stick for investment strategies – in the article, we will look at a few of the major indexes used as benchmarks for equity investing in the industry and what makes them unique.

S&P 500

The Standard and Poor’s 500, also known as the S&P 500, is a stock index composed of the 500 Largest U.S. companies listed on the stock exchange. The S&P 500 has a market capitalization of $33.8 trillion and is composed of growth and value companies. This index helps measure the performance of growth and value-based investment portfolios, or what Dave Ramsey often calls “Growth and Growth & Income” companies.

Russell 2000

This index tracks the roughly 2,000 smallest U.S.-based companies. These small companies attract investors with their strong upside potential and fit the bill as “aggressive growth” companies because of their commitment to aggressively reinvest assets into their company’s growth. As you can imagine, investors like the sound of buying low during a company’s infancy and selling high as they reach the top of their respective industries. Russell 2000 investors expect (hope) those companies to have that type of trajectory.

MSCI EAFE

Unlike the other two indexes, which contain strictly U.S. companies, the MSCI EAFE is an equity index that captures large and mid-sized representation across international companies. This index weeds out emerging markets, which would be highly volatile, and instead focuses on 21 developed countries worldwide. This list does not include the U.S. or Canada and provides a helpful benchmark for internationally-focused investing. As a follower of Dave Ramsey, you might know this as the final piece of his four recommended equity investing categories (Growth, growth and income, aggressive growth, and international).

If equity investments are right for your portfolio, benchmarks like these will play a pivotal role in developing your investment strategy. If you’re saving for retirement or another goal that’s down the road, contact our team today to schedule a meeting with one of our advisors.

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