Re-Laying the Foundation

laying foundation, building brick wall illustration

August 23, 2021

I’ve seen that look. Sometimes I’m in the middle of a meeting, talking about the economy, investments, risk, return and bam….the eyes glaze over, the head tilts to the side, and I know I’ve lost them. Some may stop me, some may politely nod and agree with everything I’m saying, some may even start looking out the window. The fact I lost them is my prod to go back and reconnect right before the little voice in their head starts saying, “Is this guy speaking English?”

Educating on investing is like building a brick wall. If you don’t get the foundations right, or if you miss a couple of rows, then it’s impossible to build a wall with any stability. One of the biggest things I encourage investors to do is to measure themselves against a benchmark. This past week I had someone ask me “what’s a benchmark?” It was then I realized that everyone out there is not a complete geek like me.

An “investing” benchmark is your measurement against an index, or a combination of indexes. Simple right? Well……there’s a few other parts to it, specifically which index, and what percentage you will use of each index. Ahhh, now I’ve got it. Not so fast… there are several stock market indexes (Dow, S&P, Nasdaq, Russell, MSCI, Wilshire) and, there are several Bond market indexes, (Barclays Agg, Citi High Yield, Merrill Lynch Global Bond). Some indexes are market capped, meaning they give a bigger weighting to the bigger companies, some are equal weighted, some just provide you the mean…oh gosh.

Ok, so it’s at this stage I’m going to apologize, I’ve left out the second rung of our brick wall. Let me explain it the way I refer to it, which is actually fairly simple. Let’s start with the indexes most of us have heard about. The Dow Jones Industrial Average, commonly referred to as the Dow. We’ve seen this on the news for years/decades and most would consider as this broad stock market index. “What did the market do today? Up 100”. They would be referring to the Dow. The beloved Dow, which dates back to 1886, only has 30 stocks that make up the index. A lot of people think it’s the index that makes up the U.S. stock market but it’s a long way from that. There are around 6,000 publicly traded companies that trade on the New York Stock Exchange and Nasdaq these days, so a measure of just the biggest 30 I don’t feel gives you the best representation of the overall market. 

On the other side of the equation, the Wilshire 5000. It used to house 5000 companies but frequently bounces around 3500 companies these days, as it has some constraint around final filings etc. that kick out some of the smaller publicly traded companies. Now using this index would not give you a good picture because it includes many companies that may not be around next week, and new companies that may not have historical data.

When I talk about the U.S. stock market, I prefer to point at the S&P 500. Its constituents are generally the largest 500 companies by market capitalization, and I feel it provides a great representation of the overall U.S. market.

You could easily say, “what’s it matter?” I think the chart below will give you a good reason why. And this chart is only a 3-year chart. The 10-year differential is huge. In a business where we are trying to hit singles, ensuring you are tracking the right index is crucial.

I gave you quite a bit to chew on related to the stock market index. Well, there is an even bigger number of bond market indexes to track against. The bond market is roughly 1.5 times the size of the equity markets, but there are probably 10 times the amount of different bond indexes. So, I’ll spare you from the deep dive and just get to the point that I follow the Bloomberg Barclays Aggregate Index or the “Agg” to track bond performance. It just provides a good overall exposure.

No, you’re not done yet. Simply because you invest in the stock market doesn’t mean you should take your pick of indexes to measure against. Most retail investors have a combination of both asset classes, stocks and bonds. So, depending on your needs and risk tolerance you may have a little exposure to stocks, or a lot. Here’s how I break it down:

I know his calculation looks complicated, however every financial advisor has access to it, whether or not they want to show it to you. If you’re a DIYer, then I post the quarterly returns on my website.  

Lastly, let me tell you why I think this is not only important, but HUGELY important. This is your scorecard. This is how you measure if you’re enjoying the service. This is how you determine if you are getting value. You can’t rely on your gut, senses, emotions to tell you how you’re doing. I wish you could. This meal tastes terrible, I’m not paying. That wall looks like it’s about to fall down, I’m not paying. You have to know the numbers.

Our industry (financial services), for the past couple of decades has tried to move you away from measuring returns and focusing on planning, and or goal setting rather than focusing on returns. Why?  Because beating the index is hard. Really hard. But that is not an excuse for not trying, and reporting on it. It’s truly one of the only service businesses that most people truly don’t know if they’re getting value or not. Try it, check it out.

So that’s my PSA for this week. I truly just want you to succeed and reach all your goals. To do that you’ll need to know what you’re measuring against, and that’s the point of this week’s note.

With that here’s the buy/sell.

Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, F

Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL

The information contained in this communication does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

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