Investing Basics: Index Comparison

Andrew Leung
2 min readNov 27, 2023
Photo by Jason Dent on Unsplash

When it comes to investing there are many strategies out there for investors to utilize, and each has there own strength. One of the primary comparisons that are used by many investors is the comparison against index returns especially the S and P 500. Comparisons like this are to measure how well you would perform compared to a given bench mark and as we mentioned the S and P 500 is the most common one. Now that isn’t to say there are other sources to compare against such as the Dow Jones, NASDAQ, and many others. Most brokerage sites will offer some sort of comparison function to allow you to see how you are doing. This is done by measuring your investment gains compared to the market (aka index) returns.

It is important to note that you aren’t competing with a person when you are measuring up against an index. For example, lets say the S and P 500 had a return of 4% and the Dow Jones had a return of 3%, but you had a return of 3.5%. In this example the S and P your portfolio’s gain was higher than the Dow and lower than the S and P. So for an investor who only invested in one index (lets say the Dow) you outearned them. Its important to note that most you should treat these like measuring sticks more as a sign that you are doing something right or wrong.

After we start a comparison we also want to know the timeframe we are comparing against. The time frame we use will add value to our comparison or subtract value from your comparison. If you took the 1 day return of an investment that is usually held for long periods of time, then that comparison is going to be less helpful. The reverse is also true, where if you held a short term investment for a long time period that return percentage is not going to be as helpful. This is why there are so many different indexes that you can compare against. They aren’t all going to be perfect for what you want to measure so you have to select the correct one and the right time frame to examine.

Index comparing is a useful tool for investors as it adds context to the gains and losses you are seeing. If you are working towards a specific goal it can be a helpful landmark of whats going right and wrong.

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Andrew Leung

I will be sharing the plain and honest: truths, pros and cons as well as my experiences of Personal Finance, Side Hustles, and Investing.