Tips for choosing the right index to analyze

If you are involved in any kind of investments then you might be aware of what an index is. But if you are new to investments than you might be completely in the dark about indexes, so before we go any further let's take a moment to talk about what an index is. Basically an index is something that you are going to need to use to find out information on your investments. In investments indexes are divided into different categories and there is actually no right index for you to analyze. Basically what kind of index you are going to choose to analyze will depend largely on what kind of investments you currently have or are interested in obtaining.

As many of you are aware of there are three main indexes that are quoted on the nightly news and they are the Dow, NASDAQ, and the S&P 500, but what some of you might not be aware of is that these indexes are great if your investments are stocks, but they do not cover other types of investments, such as money market accounts, bonds, or mutual funds to name a few. For those types of investments you are going to need to look at other indexes. So basically what you need to know is that depending on your investment portfolio you are probably going to have to choose more than one index to analyze.

Here are some tips on choosing the right index to analyze.

Tip one:
The first thing that you are going to need to know about indexes is that there are many different types of indexes. So in order to choose the right type of index you are not going to be able to choose by name alone you are going to have to know what kind of investments you have and the difference in the indexes. And keep in mind that you are going to be analyzing these indexes to determine how your investments are doing, whether you should sell or trade, if you should purchase more investments, etc.

Tip two:
One of the best things about choosing an index is that even the most novice investor can choose the right index for their investments rather easily. The reason that they can choose the right index to analyze so easily is that most mutual fund prospectuses, annual reports, and statements of additional information lists the comparable index in the investment objective section. And if the fund you have uses more than one index it will list which indexes you should look at.

Tip three:
Another thing that you need to know about choosing the right index for your investments is that you are not going to be able to choose one just based on popularity. The reason you can't choose one based on popularity is the same reason as to why you can not choose one on name alone. Just because they are popular doesn't mean that the index is going to be the right one for your needs.

Tip four:
In order to choose the right index to analyze you are going to need to know about the different indexes and what they do. Here is a list of the indexes and what they are used for:
 IBC's Money Fund Report Averages - money market funds
 Citi 3 Month T-bill - money market funds
 Lehman Brothers Aggregate Bond Index - bond funds
 10 year U.S. Treasury Bond - bond fund
 S&P 500 Index - equity funds
 NASDAQ Index - equity funds
 MSCI EAFE Index - equity funds
 Dow Jones World Stock Market Index - equity funds