Using Benchmarks

An investment benchmark is a standard against which you can measure the performance of an individual security or group of securities. For example, the average annual performance of a category of investments is a benchmark against which the current performance of that same category, as well as its individual members, may be compared. For example, the average annual return on U.S. Treasury bills, representing cash investments, has been 3.7% since 1925.

Indexes are the most common investment benchmarks. Each index tracks the relative strength or weakness of a particular segment of the economy over time and is useful for capturing not only the performance of the segment it tracks, but also for evaluating the return of individual investments that fall within that segment.

Among the most widely followed benchmarks in the United States are the Standard & Poor's 500 Index (S&P 500), the Dow Jones Industrial Average (DJIA or the Dow), the Russell 2000 and the Dow Jones Wilshire 5000. The S&P 500 tracks the performance of 500 large-cap U.S. companies in ten sectors. The DJIA follows 30 blue chip companies in the United States. The Russell 2000 tracks small U.S. companies, and the Wilshire 5000 includes all of the stocks listed on U.S. markets. The index providers choose the companies tracked in these indexes and the way the components are updated, based on the particular criteria they establish.

Another significant benchmark is the 10-year Treasury bond, which is used to gauge investor sentiment. Lower yields indicate that more consumers are investing in the bond market, driving bond prices up. Higher yields tend to indicate more consumers are investing elsewhere, as decreasing demand leads to lower bond prices. You might think of prices and yields like a teeter-totter - when bond prices go down, yields rise and when prices go up, yields fall.