Why Doesn’t My Account Value Match the Market?

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Do your ears perk up every time the evening news reports how the U.S. stock market did that day?  The Dow Jones Industrial Average (DJIA) – the most frequently quoted stock market index – is “the market” to many people.  However, when you hear that “the Dow went up (or down) 13.77 points today,” that doesn’t necessarily mean that the value of your retirement plan account has also gone up. Here are some answers to commonly asked questions about investments and the returns they earn.

Q. Why doesn’t the performance of the investments in my 403(b) account match the Dow Jones industrial average or another index?

A.  Market indexes are used to gauge the marketplace in general, but they are not meant to be a duplicate of any one particular investment portfolio. Each index measures a different segment of the market. Those market segments rarely move by the same amount in the same direction at the same time. In addition, the investment selections within retirement plans vary from the investments represented in an index. Your returns will depend on which investments you have in your account.

Q. Can I invest in an index?

A. No, because indexes are not actual investments. However, you can invest in index funds, which are designed to replicate the investment returns of a specific stock or bond market index. For example, an index fund would hold all or a portion of the securities in the market index it’s trying to match. 

Q. If I invest in an index fund, would my returns match those of the index?

A. Again, no. Your returns depend on the price of the shares the day you make your purchase. The returns reported for an index are probably for a time period that doesn’t match the exact period when you invested your money. Here’s an example: The return on Standard & Poor’s 500-Stock Index (S&P 500) for the second quarter of 2009 reflects the change in the index on the first and last days of that quarter. Say you own shares of an S&P 500 index fund in your 403(b) plan. The price of a share on the days you purchase shares of this index fund and the amount you contribute will affect your return on that fund for the quarter. In addition, your index fund has expenses, whereas an index does not. The expenses will reduce the return on your investment. However, investing in an index fund can help you closely track the returns of a broad area of the investment marketplace, at a lower cost than actively managed mutual funds.

Q. Where can I turn to get help in analyzing the investment selections in my retirement plan portfolio?

A. Investment advisors, publications that review mutual funds and a fund’s prospectus can provide important information to help you evaluate a particular fund. In addition, you can find out more about the funds available in your plan from your district. Always consider your own financial goals, timeline for reaching those goals and tolerance for risk when selecting investments. After all, the real measurement of success is whether your portfolio is on track to meet your goals – while letting you sleep at night.