If you watch financial television with any regularity, you've probably noticed all the excitement about the Dow Jones Industrial Average's recent forays into record territory. Each day, the announcers seem to be waiting anxiously to find out whether the Dow will set a new record. You can even see a special ticker that indicates how far above or below the last record close the Dow is at any particular moment.
But if you look at more than one index, it's easy to get confused about the state of the market. All three of the Dow Jones averages, including large-cap industrial, transportation, and utilities stocks, are at or near record levels. The Russell 2000 index, which measures the performance of smaller companies' stocks, is also at a record high. Even the broadest measures of stock behavior, including the Wilshire 5000 and the NYSE Composite, are at or near record levels. However, the S&P 500 is still well off its highs, and the Nasdaq Composite is hovering at about half of its peak value in 2000.
What matters to you
Tracking the vast number of current stock indices is almost impossible -- but fortunately, it's not too important. Index figures make great news; they let people see the general direction of the markets, and present a simplified view of the health of the investment world that's easy to understand. But you shouldn't let yourself get too hung up over what happens with a given index or average on any particular day.
Your most important question should be whether the investments in your portfolio are giving you the returns you expected. Averages, alas, don't necessarily tell you anything about the stocks you happen to own. For example, those of us who were wise or lucky enough to have owned shares of Altria Group (NYSE:MO) over the years found it amusing when the Dow started breaking its old records last fall. In the six years it took the overall Dow to regain its former high levels, Altria shares tripled. Meanwhile, investors who owned shares of Dow laggards like Intel (NASDAQ:INTC) and Alcoa (NYSE:AA) were in no mood to celebrate, with their shares having lost a substantial portion of their value over the same period.
On the other hand, it's true that the performance of a particular stock often matches the direction of the overall market. After all, some factors apply to the overall economy, affecting the stock prices of all companies to some extent. However, it's important not to carry this assumption too far. Even when the stock market has fallen precipitously over extended periods of time, some stocks always provide excellent returns for their investors. Similarly, just because the overall market is performing well, don't assume that the companies you invest in will rise as well.
Betting on the indices
Of course, if you've decided not to make bets on individual stocks, investing instead in mutual funds or exchange-traded funds pegged to a particular index, you obviously care very much how that index performs. One extremely appealing thing about index funds is that you never again have to worry about whether your investments are keeping up with the overall market; if you hear on the nightly financial report that your index rose that day, you can rest assured that your index fund rose a similar amount. That certainty is much nicer than watching your actively managed mutual fund fail to keep up or even lose ground in a rising market.
Indices also helpfully provide a benchmark to help you evaluate your own investment performance. Even though every investor hopes to find stocks that will rise regardless of the overall market, it's still harder to find good investments when stocks are generally performing badly than when bull-market mentality lifts the prices of nearly every stock on the exchanges. During particularly bad market years, investors can be content to simply break even, even if they could have earned more simply by investing in Treasury bills or opening a CD at the local bank. Similarly, while a 20% return over a given year may top your initial expectations, it seems somewhat less impressive if the overall market rose 50% in the same span.
In general, although news of record highs among various stock market indices can make for a nice headline or leading story on the nightly news, market averages aren't too important to most investors. At the end of the day, the average investor's portfolio performance will be less important than what return you earned on your investments. The direction of the overall market may make it easier or harder to find good companies for your investing dollars, but rest assured, some company out there will always give you the returns you want.
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Fool contributor Dan Caplinger remembers his constant frustration when his mutual funds fell on up-market days. He owns shares of Altria Group. Intel is an Inside Value pick. The Fool's disclosure policy is anything but average.
