When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing against a benchmark allows an investor to accurately gauge the actual performance of his or her portfolio. For example, an annual portfolio return of 15% may seem substantial, but if the portfolio's benchmark achieves an annual return of 20% over the same time period, the 15% return may actually be less than optimal.

The best way to find a proper benchmark for your portfolio is to look for an index that is comprised of equities that are similar to those in your portfolio. Therefore, although the Dow Jones Industrial Index (DJIA) is one of the most famous indexes, it is not a small-cap index and should not be compared against a small-cap portfolio. One of the best indexes to use as a benchmark for small-cap performance is the Russell 2000 Index.

The Russell 2000 index was created by the Frank Russell Company and it is currently comprised of 2,000 small-cap companies. These companies are U.S. equities that come from a wide variety of industries. According to Russell's July 2006 data, the average market cap of the Russell 2000 is $1.05 billion; the largest company is $2.357 billion in size and the smallest has a market cap of $95 million. The annual average return for the 10-year period of the index was 9.69%.

Another index that can be used to gauge the returns of a small-cap portfolio is the Standard & Poor's Small Cap 600 Index. The index is smaller than the Russell 2000, with only 600 equities. According to data released by Standard & Poor's in June of 2006, the average size of a company in this index is approximately $900 million, with the largest company weighing in at more than $3 billion and the smallest at a market cap of $60 million. This index has produced an annual average return of 13.6% over the past five years.

Along with index benchmarks, investors can also use a variety of small-cap focused mutual funds to compare their returns. Many mutual funds run by various companies focus on the small-cap segment of the market. However, when deciding which fund would be best used as a benchmark, an investor should first read the fund's investment strategy to ensure the comparison will be accurate.

To learn more, see Index Investing, Indexes: The Good, The Bad And The Ugly and What Is A Small Cap?

  1. What are the most important equity market indexes?

    The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide ... Read Full Answer >>
  2. What is considered a good turnover ratio for a mutual fund?

    What is considered a good turnover ratio for a mutual fund depends on the fund's composition and structure, its stated investment ... Read Full Answer >>
  3. Is it more beneficial to invest in a blue chip stock or a penny stock?

    Penny and blue-chip are terms used to describe a stock's valuations and statures. Penny stocks are generally the stocks of ... Read Full Answer >>
  4. What is the difference between a penny stock and a small cap stock?

    A penny stock and a small-cap stock represent the shares of a company with low market capitalizations. However, there is ... Read Full Answer >>
  5. How can I tell whether a particular small cap stock has a positive investment outlook?

    The investment outlook for a small-cap stock is determined by operational outlook and current stock price. The operational ... Read Full Answer >>
  6. Why should I be looking at small cap stocks as a potential investment?

    Investors should look at small-capitalization stocks for upside growth potential and portfolio diversification. Despite these ... Read Full Answer >>
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