Investors should only use S&P 500 year-to-date data as a general indicator of the year's total market performance, according to Forbes. Investors can also use the index as a historical benchmark for evaluating a portfolio's performance.Continue Reading
Standard & Poor's index tracks 500 of the top performing companies traded in American stock exchanges and weights them based on their market values. Because of the broad number of companies included in the index, experts have often considered the S&P 500 as an accurate microcosm of the market as a whole, making it a great benchmark for portfolio evaluation. One such measure is the Sharpe ratio, which measures the risk-adjusted return of a portfolio. The Sharpe ratio for the S&P 500 over the past 15 years was 0.19, so a return in excess of that amount would be considered better than the market average, explains Wealthfront.
Forbes warns that the S&P 500's market-value weighting means that the top performing stocks may have an outsized effect on the index. In 2015 more than half the index's total market cap came from just 50 stocks. Also, because Standard & Poor's adjusts the index's composition on a regular basis to only reflect the best performing stocks, the index may not accurately reflect poor performance in some sectors of the economy.Learn more about Investing