Transcript:
Easan Arulanantham:
What is a benchmark? You know, what are some of the big standard ones? And how do I make sure I’m using the right benchmark for my investments to evaluate its performance?
Tom Vaughan:
Yeah, so that’s, you know, what is a stock or bond market benchmark? It basically comes up quite often. You know, the one that I talked about on my show that I just covered with the weekly summary is the S&P 500. I feel like if I have to follow one index that everybody seems to know about, that’s the one I’d follow. It’s 500 stocks. They’re curated by Standard and Poor’s, basically. So they have to have some earnings. And they have different criteria. And so they they kind of like a quality screen to get on there. But it’s fairly representative of the overall market, right? Because it’s big enough. And its market cap weighted. So the big companies are going to have a bigger impact. Sometimes that’s not always a good thing. But versus the Dow, which is the one that I hear about the most. I mean, I don’t follow it, honestly, because it’s 30 stocks. I do follow it a little, obviously. But it’s 30 stocks instead of 500. But it has a really weird connect scenario, because it started in 1883. It’s actually price weighted, weighted by the price. So a stock that has a higher price will have more impact on the Dow and I don’t know what price has to do with anything because now you can split. And all these things. Matter of fact, I just saw things saying that Google and Amazon now have a chance to get on the Dow, because they’re splitting. And because their prices come down. Whereas before they couldn’t get on the Dow because you know, they would have dominated the Dow they were so expensive to $3,000 per share. So that doesn’t make any sense to me. I don’t know. It’s so interesting.
So and then the next one, of course, is the NASDAQ, which is a good index and has been a great index to fall for periods of time. It’s 1000 stocks. And it’s mostly technology oriented, right. So that’s where you’ll see kind of these tech stocks live, you can kind of tell what’s happening in the growth stock arena by looking at what’s happening with the NASDAQ. Then, of course, we got the Russell 2000, which is, you know, the Russell 3000, which is like most of the stocks on the entire market. That one most people don’t know about the Russell 1000, which is the bigger stocks again, that’s not when people know that much about the Russell 2000 is kind of that bottom two thirds is 2000 stocks. And so if you’re looking for what’s happening with Small Cap stocks that day, that’s what you’d be looking at, in my opinion, those are the four biggies. They’re right there on Yahoo Finance every day 1234, right, just in that exact order. Now, if you really want to do what we’re doing in terms of benchmarking, in my opinion, you go to Vanguard, and you use their existing mutual funds or ETFs as your benchmark, because Vanguard does an incredible job of including so many securities, Large Cap Mid Cap, Small Cap micro cap, which is not included in many. And so the Vanguard Total Stock Market Index is a US index, right, and it has 4136 stocks on it now that changes all the time, but something around that number. And it’s the most broad index. It’s what we benchmark our US holdings against, right.
And then Vanguard also has a total international stock market index, which is very good at replicating the entire international arena, emerging markets, developed markets all of it. And so that’s how we benchmark any international holdings that we have in the stock market. And then if we have some that are kind of a mix of US and international, that Vanguard has a total world, right, which is the combination of both the total US and the total International, right, so those are three for the stock market. That’s what we use. That’s how we benchmark, our clients have access to a portal where we use those as our benchmarks. And the reason I always use those because anybody can go buy those, you can’t actually buy the S&P 500. You can buy a replica of it. And you know, that type of thing. So you can go buy Vanguard for very inexpensive and don’t have to pay somebody like us. So we’re trying to show, you know, did we create value in our management or not after our fees and all those different types? Did we beat the Vanguard? Or did we not so and then of course, just very quickly, there’s a total bond market index BND, which is the ticker symbol for the ETF is a very good representation of the US bond market, total international bond market would be for international bonds and then total world right so there’s six world stock, US stock international stock world bond, international bond and US bond right so those six can really round out your benchmarking, if you really want to see how you’re doing, then use those indexes in my opinion. I talked about the S&P 500. Because that’s what people know about. Right. And so and of the four biggies, it’s the one that makes the most sense to look at.
Easan Arulanantham:
Whenever you’re evaluating performance, you also don’t want to just take check one period, you want to be checking how they’re going in the last couple of months? How are they doing the last year? How are they doing the last three to five years? Because maybe a stock is hot right now, or it’s cold, but maybe its overall performance for the last three years has been really good.
Tom Vaughan:
I was just looking at a client’s account the other day, and he was an early investor in Facebook now called meta. And Facebook has had a really hard time here in the last 12 months, right? I mean, really, unbelievably underperforming, say VTI, the total stock market index with Vanguard yet if you back that up just a three or five years, he has a fantastic rate of return versus the overall stock market. So yeah, perspective on time periods is still pretty important to take a look at and that’s a good point. Yeah.