What Is A Stock Market Index Anyway?
“A stock market index tracks the performance of a group of stocks or assets and gives investors a efficient way to gauge the overall health of the market.” – Anthony De Santis
Some background on market indices
Although you might think of stock market indices as products of the modern information age, they’ve been around since 1884 when Wall Street Journal co-founder Charles Dow started the Dow Jones Transportation Average (DJTA.) The original DJTA consisted of nine railroads, eleven transportation companies, and two non-railroad companies. Twelve years later, Dow and his colleagues conceived the better-known Dow Jones Industrial Index (DJIA).
Around 5,000 indexes in the United States are attempting to make it more straightforward for investors to determine when markets are “up” or “down” and analyze their overall health.
As mentioned, a market index’s usefulness is in tracking the performance of certain groups of stocks, bonds, or other types of investments. Rather than monitoring millions of stocks individually, investors can follow selected indices such as DJIA, Nasdaq, or the Wilshire 5000, which includes all US stocks. Early indices had limited usefulness due to their highly concentrated nature and idiosyncratic calculations. Indexes are often grouped around a particular sector with no set size. For instance, the CRSP index has nearly 3,700 companies listed, while the DJIA indexes only 30.
The S&P is often cited as the first beneficial modern benchmark and remains popular with investors. In 1957, the S&P 500 index was introduced to give investors a more diversified market-cap-weighted selection of stocks. Since the S&P’s inception, more asset classes have been mapped out, such as bonds, which got their first index in 1973. The worldwide success of exchange-traded funds (ETFs) ensures the growth of indices will continue in the future.
What about indexed annuities?
Fixed indexed annuities (FIAs) are financial instruments offering minimum guaranteed interest rates combined with interest rates linked to a particular market index. Most indexed annuity products use broad, well-established indices such as the S&P 500 Composite Stock Price Index. A few fixed annuity products offer you the option of selecting more than one index. Designed to allow investors to participate in some market gains while protecting against downside risk, fixed-indexed annuities are an increasingly popular choice for pre-retirees and retirees.
FIAs are not the right choice for everyone. If you’re considering an FIA, it is critical to understand that this particular product can be somewhat complicated compared to other investments. For example, multiple indexing methods are used to calculate an FIA’s gains. You’ll need to know how your annuity was calculated because different ways impact the amount of interest credited to your account. That’s why it can be challenging to compare one fixed annuity product to another.
I advise anyone who wants to add a fixed-index annuity to their portfolio to do your research and due diligence instead of relying on what an annuity salesperson tells you.
It would help if you also spent time with a qualified retirement and income specialist who can give you an in-depth evaluation of the annuity you’re considering and answer all your questions.