Choices Galore

As I noted in Chapter 2, “Risk and Disaster Don’t Have to Go Hand-in-Hand,” investors have been gravitating toward the most familiar benchmarks for decades. For the past 100 years, the most popular benchmarks by leaps and bounds have been the S&P 500 and the Dow. Investors tend to go with what makes them comfortable, what they know, and what they can easily check. The S&P, in particular, is the go-to index because of its diversity of holdings. The Dow, with only 30 holdings, is probably the most frequently talked about, but it’s not the best barometer. There are a few major U.S. indexes (see Table 7.1), and they’re all different in their construction.

Table 7.1. The Major Indexes

S&P 500	This value-weighted index, published since 1957, consists of 500 large-cap common stocks actively traded in the United States.
Dow	The oldest of the indexes, the Dow is computed from the prices of the 30 largest and most widely held public companies in the United States. It’s market-value weighted, and the weighting percentage for these components adds up to 100%.
NASDAQ	The NASDAQ, started in 1971, holds 3,200 companies and is known for being a bellwether of the technology sector.
Russell 2000	The Russell 2000 is an index of 2,000 small-cap companies in the United States and is a subindex of the Russell 3000.