Lynn O'Shaughnessy

During the past 12 months, for instance, the S&P 500 Index has generated a return of 15.2 percent. During the three- and five-year period, the benchmark has posted annual returns of 12.2 percent and 8.5 percent respectively. Do you know how well your large-cap mutual funds or your portfolio of large individual stocks did in comparison? If this question stumps you, it's not surprising. All too often, investors fail to look at benchmarks like the S&P 500 to see how their investments stack up. Unless you know what the universe of blue chips has been up to, you can't possibly know whether the performance of your large-cap stock fund has been fantastic, pitiful or something in between.

You also need to make these same comparisons with other types of investments. If you own a small-cap domestic stock fund, for instance, you can contrast its stats with the Standard & Poor's SmallCap 600 Index or the Russell 2000 Index. If your funds tilt toward value or growth stocks, there are more specialized indices from the same sources that you can use. Investors with bond funds can turn to the Lehman Brothers Aggregate Bond Index as a benchmark.

It speaks to the power of the S&P 500 that Wall Street observed its birthday. It's a bellwether for the U.S. economy that is documented closely. In nearly every newspaper, you can find out what the S&P 500 did the previous day. And recently, the index merited its own coverage by inching up to a high it hasn't reached since the halcyon days of the dot-com phenomenon. When I was recently talking to an executive at Standard & Poor's, he complained that the phone wouldn't stop ringing because of the S&P threat to break the record.

But an important lesson can easily be lost in all the hoopla. Though the S&P 500 encompasses nearly 75 percent of the U.S. market's valuation, it's not just the big boys that deserve an honored spot in most investors' portfolios. While the S&P 500 has posted an annual return of just under 11 percent for 50 years, the nimble small-cap stocks have won the race by generating an annual return of just more than 13 percent. And small-cap value stocks generated an astounding 17.7 percent.

I'm not advocating that everybody drop the newspaper and rush to find a hot, little small-cap fund, which are far more volatile. But you should make sure you are diversified among all the most important investment categories - large and small-cap stocks, foreign stocks and domestic bonds. If you cover all those bases, you won't have to worry as much about the longevity of a famous middle-aged index.

Lynn O'Shaughnessy

Lynn O'Shaughnessy is the author of Retirement Bible.

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