%20copy.jpeg)
Indexes are widely discussed in the news and often posted front and center on financial websites. This month we’re digging in and examining what they are and how they relate to your portfolio.
What are Indexes and What Do They Do?
An index's sole purpose is to track the movement of a group of investments. While the markets are open, indexes fluctuate based on the changing prices of the investments included in their mix. Experts then analyze these movements - seeking past trends and forecasting potential future trends, similar to how a weather forecaster analyzes weather patterns.
Given that there are countless investments, there are a multitude of indexes, each tracking different areas of the investment world. They track items such as:
- A particular stock exchange
- An industry or sector
- A country or group of countries
- A specific investment theme
- Private investments
- And so much more...
Honestly, if it can be tracked there is likely an index for it.
There are also a variety of companies that create indexes, including:
The Most Popular Indexes
The four indexes Canadian news outlets regularly discuss, and post are:
- S&P/TSX Composite – Tracks approximately 250 of the largest companies on the Toronto Stock Exchange.
- NASDAQ Composite – Tracks more than 2,500 stocks on the New York Stock Exchange.
- S&P 500 – Tracks the top 500 stocks in the New York Stock Exchange based on market cap.
- DOW – Tracks the top 30 publicly owned blue-chip companies on the NASDAQ.
Investors & Indexes
Many investors feel overwhelmed when it comes to understanding investments. But keeping an eye on the movement of the more popular indexes will help an investor wishing to be better informed.
Now, when following indexes, it’s important to note no index is a 1:1 match for your portfolio. Indexes also do not take into consideration your goals, time horizon and risk profile like your portfolio – they are simply for tracking. However, tracking the movement of markets can allow for a more in-depth understanding of how your portfolio performs in varied market conditions, allowing you to pose more complex questions about your portfolio. Some good introductory questions you could ask are:
- What is my portfolio’s investment strategy?
o Is it to mimic an index?
o Is it to outperform in all markets?
o Is it to protect when the markets drop?
- How has my portfolio performed under certain market conditions?
- How does my portfolio's volatility compare to that of the index?
- How does my risk profile factor into performance?
These questions can provide valuable insights and help give you more confidence in your investment strategy.
If you want to discuss indexes and how they relate to your portfolio, feel free to contact your Q Wealth Associate Portfolio Managers at KLT Wealth Management.
- Courtney Beach QAFP
