Simple Pound

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Diversification is probably one of the most often used buzzwords of any investor. The reason for this is called minimising risk - even the best investors (which are, may I remind you, most often people who spend all day researching) will eventually get something wrong and a fund or stock that was supposed to become tomorrow’s miracle simply didn’t. As long as you haven’t invested all your available money in this one option, any losses in that position will be balanced by the gains made with others.

That’s why I’m not only going to look at UK indices, even though you could argue that investing in a fund already provides you with a pretty good diversified portfolio to start with. But pretty good might not be enough if the whole economy here is heading towards a slow-down (I’m not saying it is, just it could), while other countries are experiencing a phenomenal boom.

So after we’ve examined UK indices in more detail, I want to have a closer look at what the United States have got to offer (in terms of investment…).

• Dow Jones Industrial Average: Commonly called “the Dow“, this index consists of the 30 largest and most widely held public companies in the U.S. Most of these companies have little to do with heavy industries, so the “Industrial Average” part of the name is mainly to be seen in a historical context. It was first published in May 1896 and started at a level of 55.6 being the simple average of the 12 companies represented in the Dow at the end of the 19th century. Among the companies (now) included in the Dow Jones are Intel, Microsoft, Pfizer, AT&T, Exxon Mobil, Coca Cola, Walmart and many other well-known corporations. The Dow Jones I.A. gained 23.11% in the last 5 years.

• S&P 500: The Standard & Poor’s index contains 500 large-cap corporations listed on major US stock exchanges (e.g. the New York Stock Exchange), which are selected by a committee and in fact include a few non-U.S. companies (11 in 2006). It is the most widely watched index after the Dow Jones I.A. and considered to be a bellwether for the US economy. The 100 leading U.S. stocks within the S&P 500 eventually got an index in their own right: the S&P 100. Its constituents are selected for sector balance and represent about 45% of the market capitalisation of the U.S. equity markets (~ 57% of the S&P 500’s market cap). Familiar companies within the index include Oracle, Pfizer, Cisco, Dell and Ford. The S&P 500 (blue, below) grew by 29.24% within the last five years, while the S&P 100 (red, below) only increased by 17.04% during the same period.

• Nasdaq Composite: The NASDAQ is an American electronic stock marke, that currently lists a little more than 3,000 companies (3,125 if you really wanted to know) which are aggregated in an index called the Nasdaq Composite. This index is commonly taken as an indicator of the performance of technology stocks - after the dot com bubble burst, the index declined to half its value within a year and is still trading for less than half of its peak value (5,132.52 in March 2000). The Nasdaq 100 (blue, below) is a subset of the Nasdaq Composite comprising the 100 largest (domestic and international) non-financial companies listed on the Nasdaq Stock Exchange. It grew by 34.41% in the last 5 years and includes firms like Sun Microsystems, Apple, Ebay, Yahoo!, Sandisk, Adobe and Google.

After covering the major indices in both the UK and the United States, I’ll shortly investigate what’s available in Europe and Asia, which should be exciting as this will include indices covering emerging markets!

Read part 3 of “What are we tracking?” on European indices >>

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