Understanding Indexes

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MORE MEASURES THAN THE DOW

Although the Dow may be the most widely reported index, there are others that measure many broader market sectors. There are indexes for domestic stocks, foreign stocks, large companies and small companies, domestic bonds, foreign bonds, long-term bonds, short-term bonds, etc.

If you have diversified your portfolio by choosing securities in various asset classes (stocks, bonds and/or cash reserves) and investment styles, you should not look exclusively at a general index like the Dow to fairly measure the performance of your securities. For the most accurate evaluation, you should view your portfolio in the context of each of the different asset classes or investment styles that it includes. There are indexes that can provide measurement for a very broad or a very narrow market segment. For example:

THE STANDARD & POOR’S 500® INDEX (S&P 500) is a broader market measurement than the Dow and, more and more, is seen as the benchmark of the U.S. stock market – specifically for large company stocks. The S&P 500 tries to cover all major areas of the U.S. economy. The index does not follow the 500 largest companies, rather the 500 most widely held companies chosen with respect to market size, liquidity and industrial sector. The S&P 500 is a market capitalization weighted index, which means that each stock is weighted according to the total market value of its outstanding shares. Therefore, the stocks of larger companies have a greater impact on the performance of the index than the stocks of smaller companies.

THE NASDAQ COMPOSITE INDEX® includes more than 3,000 stocks. Most are technology and Internet-related, but there are financial, consumer, biotechnology and industrial companies as well. The index covers all the stocks that trade on the National Association of Securities Dealers Automated Quotation system. Brokers get price quotes through a computer network and trade via telephone or computer network. Since there is no centralized exchange, NASDAQ is some- times referred to as the over-the-counter market, or a negotiated market. Like the S&P 500, the NASDAQ is a market capitalization weighted index, so the larger companies tend to dominate the index.

THE RUSSELL 3000® INDEX is considered a broad market index and follows the 3,000 largest American stocks. Started in 1984, it includes only common stocks within the U.S. and its territories. This market capitalization weighted index can be subdivided in to two segments: the Russell 1000 and Russell 2000.

THE RUSSELL 1000® INDEX monitors the 1,000 largest U.S. companies. The companies in this index range in size from $1 billion to more than $300 billion, based on market capitalization. The index is highly diversified, as its component stocks rep- resent all the major sectors. Although the Russell 1000 Index represents one-third of the stocks monitored by Russell, it accounts for approximately 92 percent of the value of the Russell 3000.This is a commonly used indicator for the U.S. large company stock investor.

THE RUSSELL 2000® INDEX comprises the remaining two-thirds of the companies monitored by Russell. The Russell 2000 is considered representative of U.S. small-company stocks. The value of these stocks represents the remaining 8 percent of value of the Russell 3000.The Russell 2000 is reconstituted annually to help ensure larger stocks do not distort the performance and characteristics of the small company set.

MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EAFE® INDEX (EUROPE, AUSTRALASIA, FAR EAST)
 is considered a popular benchmark for following international stocks. It is composed of more than 900 securities and consists of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

THE RUSSELL 2000® INDEX comprises the remaining two-thirds of the companies monitored by Russell. The Russell 2000 is considered representative of U.S. small-company stocks. The value of these stocks represents the remaining 8 percent of value of the Russell 3000.The Russell 2000 is reconstituted annually to help ensure larger stocks do not distort the performance and characteristics of the small company set

If you want to measure the benchmark performance of fixed- income securities, you have another universe of indexes from which to choose. A fixed-income investment should be com- pared with the appropriate bond index depending on the type of security and its maturity. For example:

THE LEHMAN BROTHERS® AGGREGATE BOND INDEX is used to track U.S. bonds as a broad asset class, and is made up of investment-grade, fixed-rate treasuries, corporate bonds, mortgage-backed and asset-backed securities. All bonds in the index should have a maturity of greater than one year, have at least $100 million available to investors, be publicly issued and be U.S.-dollar-denominated and non-convertible (which means that the bond cannot be converted in to a stock).

THE CITIGROUP WORLD GOVERNMENT BOND INDEX is a frequently used benchmark for tracking international bonds, although it does include U.S. securities. The index is composed of government bonds with an average maturity of seven years. It includes the 20 government bond markets of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom and the United States.

This is a much-abbreviated sample of indexes for each specific segment of the financial markets. When measuring investment performance, it is important to use the appropriate comparative indexes in order to make a meaningful evaluation.

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