The Standard & Poors 500

Also called the S&P 500, the Standard & Poors index, which
most professional money managers say that they use as the
benchmark against which they measure their own investing
prowess, is the one that has become the dominant benchmark
in U.S. investing in recent years.

Although the S&P is not really the appropriate measure of
performance for bonds or the stocks of small-sized companies,
nor the apt standard against which to judge international
investments, the index is still used to gauge these
investments’ performances anyway.
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Line = index
Bars = specific mutual fund

The S&P 500 tracks the performance of 500 stocks, comprised
of 400 industrial companies, 40 utilities, 20 transportation
companies, and 40 financial firms. A committee at
S&P reviews the companies periodically and may replace up
to 30 for reasons that include, for example, bankruptcy.
The performance of the 500 stocks is run through a computer
software program that calculates a daily measure of the
market’s rise or fall as well as an overall performance figure.
These are the numbers you hear reported on the nightly
news, see in the newspapers, and can view on your computer
screen if you log on to a personal finance Web site.

The S&P tells you the average performance of the stocks in
the index. This performance is reported as both numbers and
percentages. If the S&P goes up, your newspaper might
report that “
the S&P
went up 2
points or 6% today.” When
the stock market is doing well the numbers and percentages
go up. When it’s doing poorly, they go down.

The S&P 500 is home to some of the hottest stocks of the
late 1990s, including AOL and Dell, the latter of which gave
investors an unrivaled 79.7% average annual return, not for
a day, not for a month, but for 10 years. With so much fanfare,
the S&P has become the index to beat for mutual fund
managers. Outperforming it is cause for celebration — only
1 out of 10 mutual fund managers do so in any five-year
period.