You'll need an index to do the job

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By Dorothy Rosen • Bankrate.com

You'll need an index to do the job

Dear Dollar Diva,
What is an investment index?

Webster's dictionary defines an index as a device that serves to indicate a value, something that leads to a particular conclusion.

That's what an investment index does. It reports the performance of a segment of the stock market, and it helps you determine how your investment is performing in relation to that market segment. Like the surveyor's benchmark or the golfer's bogey, it serves as a reference point.

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You should measure your investments against an appropriate benchmark at least once a year. If they consistently under-perform, consider moving your money to a better investment.

Where does it come from?

Various financial institutions maintain countless indexes that function as benchmarks for the stock market to companies with a social conscience -- and new ones are being added all the time. Here is a sample of commonly used indexes:

Standard and Poor's 500 Index: This index is made up of 500 stocks representing all the major industries in America. It is designed to indicate the performance of the overall U.S. market. This index is often used alongside a sector index to show how a portion of the economy is doing in relation to the overall market. Abbott Labs, General Electric, Merck, Procter & Gamble, Wal-Mart and Microsoft are companies included in the S&P 500 index.
Goldman Sachs Technology Index: This index was created in 1996 with 176 technology stocks. It measures the performance of U.S.-based technology companies, including Microsoft, Intel, Cisco, Lucent, IBM and AOL.
Morgan Stanley Capital International Europe, Australasia, Far East Index, or the EAFE: This index measures the investment returns of the developed countries outside North America. It includes stocks from 21 countries, including Australia, Japan, Germany, the United Kingdom and Hong Kong.
Lehman Brothers Intermediate Government/Corporate Bond Index: This index is measures the performance of government- and investment-grade corporate debt securities with maturities between three and 10 years.

Choose appropriate index to measure success

A Blue Chip Growth Fund invests in stocks of large, well-known, established companies, such as General Electric, Merck, Pfizer, Microsoft and Wal-Mart, with the expectation of above-average growth potential. It can be measured against the S&P 500 index. If your fund earned 30 percent in a period when the S&P 500 gained 20 percent, your fund is outperforming the market and you should smile.
A Technology Fund contains technology stocks, such as Microsoft, Cisco, Lucent and Intel, for long-term growth of capital with the expectation that a high return will accompany the high risk involved. It can be judged against the Goldman Sachs Technology Index.
An International Growth and Income Fund holds stocks in foreign companies that pay dividends and have the potential for capital appreciation, including companies in Japan, Australia, the United States and various European countries. You can use the Morgan Stanley Capital International Europe, Australasia, Far East Index.

An Intermediate Bond Fund invests in medium- and high-quality bonds with a maturity between three and 10 years for high current income. The Lehman Brothers Intermediate Government/Corporate Bond Index is a benchmark.

Fund vs. index
Compare a mutual fund's performance to a corresponding index
Mutual Fund vs. Index	Performance
Mutual Fund vs. Index	1 year	3 years	10 years

Blue Chip Growth Fund	18.9%	22.3%	15.9%
S&P 500 Index	20.9%	24.3%	17.8%
Analysis: You doubled your money in less than four years -- sweet. But not sweet enough. When you compare the Blue Chip Growth Fund to the S&P 500 Index (in red), you came in 2% below the market, year after year. That's probably because of the management fees. You'd be better off in an index fund.

Technology Fund	40.0%	40.0%	N/A
GS Technology Index	82.7%	47.0%	N/A
Analysis: Holy mackerel! You doubled your money in two years -- can it get better than that? It sure could -- witness the Goldman Sachs Technology Index. Your performance in the Technology Fund was less than the market. Look for a new fund.

International Growth Fund	22.4%	13.2%	7.6%
EAFE Index	21.4%	12.2%	6.6%
Analysis: It looks OK, but it's not a great fund -- right? Wrong. The International Growth Fund beat the Morgan Stanley Capital International EAFE Index every year for the past 10 years. Bingo! You beat the market.

Intermediate Bond Fund	2.2%	6.4%	7.8%
LB Int Gov. /Corp.	1.1%	5.4%	7.3%
Analysis: The performance of the Intermediate Bond Fund is horrible only if you don't want to be invested in bonds -- and compare it to stock returns. If bonds are part of your asset allocation, you selected a good fund that beat the market. It's a keeper. -- Posted: Dec. 29, 1999