The total return of a stock index like the S&P 500, which is widely quoted as a benchmark for stock performance, is a calculation that depends on the change in the index, either positive or negative, plus reinvested dividends. Since an index is not an investment, but a statistical computation, however, the reinvestment occurs only on paper—or more precisely, in a software program. Rather than reinvesting dividends in the stocks that pay them, the index provider reinvests all dividends in the index as a whole. Total return on an index is calculated daily, though the results are more typically provided as monthly, annual, or annualized figures, expressed as a percentage.
Capitalization-weighted indexes are designed to reflect the economic impact of companies with the highest market capitalization. Market cap is calculated by multiplying the number of shares by the stock’s current market price. The majority of indexes are capitalization weighted, including the S&P 500 and the Nasdaq Composite Index. Total return, as it applies to an equity index, is a calculation that reflects the positive or negative change in the index plus any reinvested dividends. Most equity indexes report their return two ways, one that is price return only and the other, which includes reinvested dividends.
So historical performance in the video segment is the S&P 500 Index with dividends reinvested. If the S&P 500 Index is used in an annuity or universal life product, dividends are not reinvested or distributed to the crediting account of the policy.
The S&P 500 Index can be used as a benchmark for your portfolio to gauge its performance. The S&P has experienced down markets, but has been relatively positive over long periods of time. It is also an inexpensive way to invest with comparatively low expenses. Investing in the S&P 500 Index has often been a good start in building a portfolio for new investors.
This press release contains content from Light Bulb Press with permission.