Why everyone has a different definition — and why that matters for your portfolio
You’ve heard it a thousand times. At a dinner party, on the evening news, from your coworker in the break room: “The market was up today” or “The market took a hit this week.” It’s one of those phrases people toss around as if everyone agrees on what it means. But here’s the thing — they don’t. When someone says “the market,” they could be talking about any number of things depending on their age, their career, or even the cable news channel they watch.
And if you’re trying to figure out whether your own investments are doing well, that confusion can be a real problem. So let’s break it down.
So What Are People Talking About?
When most Americans say “the market,” they’re usually referring to one of a handful of stock market indexes. An index is simply a way to track the performance of a group of stocks. Think of it like a scoreboard for a specific slice of the economy. The three you’ll hear about most often are the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite.
The Dow Jones Industrial Average, often just called “the Dow,” is the oldest and most recognizable. It tracks 30 large, well-known U.S. companies like Apple, Coca-Cola, and Goldman Sachs. If you grew up watching the nightly news with your parents or grandparents, this is probably what they meant when they talked about “the market.” It was the default for decades. But 30 companies is a pretty small group, and the way the Dow is calculated — based on stock price rather than company size — gives it some quirks that can make it a misleading snapshot of the broader economy.
The S&P 500 is what most financial professionals mean when they reference “the market.” It tracks 500 of the largest publicly traded companies in the U.S. and is weighted by market capitalization, meaning bigger companies have a larger influence on the index’s movement. If you work in finance, read investment research, or listen to any modern financial podcast, this is likely the benchmark you’re most familiar with. It’s widely considered the best single measure of U.S. large-cap stock performance.
Then there’s the Nasdaq Composite, which includes all the stocks listed on the Nasdaq exchange — over 3,000 of them. Because the Nasdaq exchange has historically been home to many technology companies, this index skews heavily toward tech. If you’re in your twenties or thirties and came of age during the rise of the big tech companies, you might think of the Nasdaq when you think of “the market.” When people say things like “tech is dragging the market down,” they’re often conflating Nasdaq performance with the market as a whole.
But Wait, There’s More
Those three indexes only scratch the surface. If you’re an investor with a diversified portfolio — and you should be — your investments probably include asset classes that none of those indexes capture. Small-cap stocks, international stocks, emerging market equities, bonds, real estate investment trusts — each of these has its own set of benchmarks. The Russell 2000 tracks small-cap U.S. stocks. The MSCI EAFE Index covers developed international markets. The Bloomberg U.S. Aggregate Bond Index is the standard benchmark for the bond market.
So when someone at a cocktail party tells you they “beat the market” last year, the first question you should ask — at least in your head — is: which market? If their portfolio is 60% stocks and 40% bonds, comparing their total return to the S&P 500 doesn’t make much sense. And if they’re only invested in tech stocks, comparing to the Dow doesn’t either.
This is where the conversation about “the market” starts to break down. We’re all using the same words, but we’re not all talking about the same thing.
The Comparison Trap
Here’s where this really starts to matter for you as an investor. It’s natural to want to measure how your portfolio is doing, and the easiest way to do that feels like comparing it to “the market.” But as we’ve seen, “the market” can mean a dozen different things. And chasing whichever index had the best year can lead to some really poor decision-making.
Let’s say the S&P 500 returned 25% in a given year and your diversified portfolio returned 14%. Your gut reaction might be disappointment. You might even feel like something is wrong, or that you should have just put everything in an S&P 500 index fund. But what if your portfolio includes bonds, international stocks, and real estate — all by design, because you’re five years from retirement and can’t afford a 30% drawdown? In that case, 14% might actually be an outstanding result. You got solid growth while keeping your risk in check.
On the flip side, if the S&P 500 dropped 20% and your diversified portfolio only fell 8%, you probably wouldn’t be complaining that you underperformed. Context matters. Risk matters. And comparing your carefully constructed plan to a single index you saw on the news is a bit like comparing your commuter car to a Formula 1 racer. They’re designed for completely different purposes.
Benchmark Against Your Goals, Not the Headlines
So if comparing to “the market” isn’t the right approach, what is? The answer is simpler than you might think: measure your portfolio against your own financial goals.
If your plan calls for 7% average annual growth to retire at 62, and you’re averaging 8%, you’re ahead of schedule. It doesn’t matter whether the S&P 500 did 12% that year or the Nasdaq did 20%. Those numbers are interesting, but they’re not your scoreboard. Your scoreboard is your financial plan.
This is what a good financial advisor helps you do. Instead of reacting to headlines or chasing last year’s best-performing asset class, a well-built financial plan sets clear targets based on your timeline, your risk tolerance, your income needs, and your life goals. It accounts for the fact that some years will be better than others and that different parts of your portfolio will take turns leading and lagging.
The real question isn’t “Did I beat the market?” It’s “Am I on track to meet my goals?” That’s a question with a clear, personal answer — one that doesn’t change depending on which news channel you watch or which index your neighbor is bragging about.
The Bottom Line
“The market” is a useful shorthand, but it’s not as universal as people think. Depending on who’s talking, it could mean the Dow, the S&P 500, the Nasdaq, or something else entirely. Each of those indexes measures something different, and none of them is a perfect mirror for your portfolio — especially if you’re properly diversified.
Rather than getting caught up in whether you beat an index that may not even be relevant to your situation, focus on what actually matters: are your investments helping you reach the life you’re working toward? That’s the benchmark that counts.
If you’re not sure whether your portfolio is on track, or if you’ve been comparing your returns to an index that doesn’t match your strategy, it might be time to take a closer look at your financial plan. A little clarity can go a long way toward turning market noise into confidence.
Confidential, please delete if you received this in error.
•Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge, a Registered Investment Advisor. Sound Foundation Wealth Advisors and Cambridge Investment Research, Inc. are not affiliated. • The information in this email is confidential and is intended solely for the addressee. If you are not the intended addressee and have received this email in error, please reply to sender to inform them of this fact. • We cannot accept trade orders through e-mail. Important letters, email, or fax messages should be confirmed by calling (704) 962-1205. This email service may not be monitored every day, or after normal business hours. Address: Duncan Financial Group; 31 Main St, Irwin PA 15642.
