The media uses various data points to demonstrate the health of the economy and push their agenda. Sometimes it’s unemployment numbers, other times it’s the consumer confidence index (CCI), or, commonly, it’s a popular stock market index.
If you’re an individual stock investor then you’re quite familiar with these indexes since they are displayed on every screen. But if you’re someone who is an index fund trader, meaning, you invest your money in a fund which tracks a particular index, then you probably should know what the popular indexes represent.
I’ll go over the popular DJIA, the Nasdaq Composite, the S&P 500 index, and, my favorite, the CRSP US Total Market index.
It’s important for you to know which indexes to follow and which stock market indexes to ignore.
Announcement: I’ve added a new JA tutorial video. It’s a 36-minute video ($30) going over how to select the right question so that you maximize your income potential and don’t end up with an unhappy customer.
The Dow Jones Industrial Average Index
The Dow Jones Industrial Average is an index which holds 30 large US companies which are publicly traded. The number that’s displayed on TV or online representing the Dow is the sum of a single stock value for each of the 30 companies.
The DJIA holds notable stocks such as 3M since 1976. It holds Procter and Gamble since 1932.
- American Express
- Cisco Systems
- Goldman Sachs
- The Home Depot
- Johnson & Johnson
- JPMorgan Chase
- Merck & Company
- Procter & Gamble
- UnitedHealth Group
- United Technologies
- Walgreens Boots Alliance
- Walt Disney
S&P 500 Index
The S&P 500 index is another commonly cited index. It tracks the 500 largest US publicly traded companies. This means that the it is focused on the large-cap stocks. So it beats the DJIA by about 470 funds.
The S&P 500 index is market-weighted and not price weighted, as is the case with the DJIA index. Therefore, the S&P 500 could have a more realistic view of the US equities market because it will be lead by the companies which dominate the market. But, still, it only represents 500 stocks.
It’s important to note that the S&P 500, like most other indexes, choose which fund to track based on a vote by members of a committee. It’s a small but important bias worth pointing out.
Nasdaq Composite Index
The Nasdaq Composite is another famous stock market index which is often cited on financial shows. It represents 3,300 common stocks listed publicly.
Because this is the Nasdaq index, it doesn’t capture any stocks which are traded on the NYSE which is something else to keep in mind before making your decisions on this index fluctuation alone.
The NASDAQ, as it’s popularly known, is also heavily focused on technology which makes it a great representation of the current tech boom we have, but would make for a very shitty indicator during calmer economic times.
It also represents some stocks which are held in other countries which makes it a slightly more diverse index, by a tiny margin. It’s made up of the following funds by percentage according to Investopedia:
- technology – 46%
- consumer services – 20%
- health care – 11%
- financials – 9%
- industrials – 6%
- consumer goods – 5%
- oil and gas – 1%
- telecommunications – 1%
CRSP US Total Market Index
You probably haven’t heard of this index. But it gets plenty of press among those who have a passive index fund investing strategy. This index follows nearly 4,000 publicly traded US stocks. Not just the largest and not just the technology sector – it covers small, medium, and large capitalization stocks.
It represents stocks which are traded on both Nasdaq as well as the NY Stock Exchange (NYSE). Not only is there no stock exchange bias but the stocks in this index are automatically chosen by an algorithm and not by a committee.
Tracking this Index
One index fund, which I’ve mentioned before, VTI, tracks this particular index. VTI is an ETF and has an identical brother, VTSAX. Whichever you invest in, you’re getting exposure to the same index.
I happen to be invested in VTSAX because I prefer the calmer waters of a total US market index as opposed to having to saddle the responsibility of picking individual stocks and knowing which of these will outperform the entire US market.
Whether this is a good idea or not, I won’t know until I’ve had a chance to live off of these investments in my retirement years. But it seems like it’s a decent investment model and others have followed it successfully. Let’s see how it works out for me.
Much like everything else in mainstream media, the indexes which should matter, such as the CRSP US Total index, aren’t addressed. The ones that get the press are the ones which concern the individual consumer the least.
Choosing a Portfolio
My portfolio includes US stock index funds, international stock funds, bonds, REITs, and real estate. I also hold cash and I am investing in my own platform which is this blog you’re reading and intellectual properties I can sell.
An investment portfolio can’t be whatever is advertised to us in the news. It has to align with our risk profile and our investing temperament.
We should be able to weather the losses without putting our household income at risk. Each investor’s portfolio should have multiple income drivers so that when one investment is performing poorly, another can provide some income.
This process is referred to as coming up with your asset allocation. The sooner you do this, the more experience and comfort you’ll develop with your investing style. This means that during poor economic times you’ll have more opportunities and during well-performing economic times you have the luxury of diversifying even more or aiming for even better profits.
My financial advisor can help me come up with the investment portion of the asset allocation. They can also encourage me and prevent me from making a big financial mistake during economic crises. But it’s on me to diversify incomes from things outside of medicine. As I’ve learned the hard way, not even the income from your medical career is guaranteed.