Stock market got you nervous? Understand the basics of the indexes and your portfolio
June 4, 2023
In a world where the news has become a place of political debate and sometimes sad stories, it has also become a place where investors often get trapped regarding the stock market. There is no question that the last couple of years have been turbulent and full of unknowns, but sometimes the basics of investing and the general stock market get caught in the latest crypto headline leaving everyday investors paralyzed.
If you are someone who often gets panicked by watching the latest news cycle, there is no shame in that, it’s easy to do in this day and age. We are here today with a few basic reminders to help ease worry during times of ups and downs.
The most talked about indexes are the Dow Jones, Nasdaq and the S&P 500. It is important to remember the Dow is only composed of 30 companies. While its performance can speak to publicly owned, large-cap U.S. companies, it is used as a way to measure the health of the stock market even though it is limited to tracking the price of those 30 stocks. It typically holds less technology stock, placing too much weight in other sectors like financial and industrial sectors. This gives the Dow much less exposure and more concentration.
The S&P 500 index consists of 500 of the leading U.S. companies’ stocks, giving it a much broader index in comparison to the Dow. This being said, the S&P 500 and Nasdaq are more concentrated around technology stocks. The S&P 500 is often used as a benchmark for the U.S. stock market, and many financial investment companies will use this as a benchmark for their portfolio performance.
While these indexes help investors gauge the performance of the broad stock market, they may not directly correlate to what is inside of your portfolio. There are many factors that play into the performance of an investment portfolio, but some of the most important include what companies are owned by an investor and how much of their portfolio is made up of one specific company stock. If one stock is doing really well but you only own a small piece of it, it will have a much smaller effect on the overall performance of the portfolio. Conversely, if you own a portfolio consisting of a large quantity of one company stock, it can negatively impact your performance quickly if the stock suffers losses.
The latter part of the equation is usually where the news gets us tied up in knots over the stock market and it is why, during times like these, it is important to have an adviser to speak to not only to understand what you own and why, but to help you weather the storms.
A good adviser strives to ensure that all clients have full transparency regarding their investments, so that they can sleep more easily at night. If this is something that has been causing you distress, consult an adviser to help you navigate the news cycle so that you can sleep easier, too.
Hillary Stalker, CFP, is an executive vice president and financial adviser at CapWealth. For more information, visit capwealthgroup.com.
