What do the Index Numbers Mean?

Today we ended the day with the TSX over 10,000 points, but we've been up and down for quite some time now. Yet few of us ask the question, what do the numbers mean?

Well, it all depends on what stocks you own. The TSX itself has a value in the billions. The number we see quoted in the papers is the S&P/TSX Composite Index, which is a selected group of the largest stocks by market capitalization.

What does this mean?

Well, it means a couple of things. Firstly, it means that if you own a smaller capitalization stock, the progress of your stock might not be indicated by the movement of the Index. The S&P/TSX Composite Index is not the entire TSX.

Secondly, a declining index doesn't mean an end to profit possibilities. There are always small companies that can prosper in conditions that would cause trouble for larger ones. There are also a number of financial investment products that suit each condition. So, a declining index doesn't mean you can't make money, it just means you need to undertake different investment strategies in the short-term, or invest for the longer-term (think back to when we discussed dollar-cost averaging).

Lastly, the index measurement doesn't mean much in the longer-term. It does mean something, but not as much as you might think. It's easy for us to get caught up in day-to-day market movements. But if you're investing for a retirement that is 10 or 20 years in the future, you shouldn't let a downturn in stocks impact your decisions. It's rather like weight loss. Ultimately, it doesn't matter what your weight is every day when you lose weight, it just matters that you're declining over time. With investing, you need to think in terms of months and years rather than days and hours. As I always say, plan your investment strategy based on your personal goals and your risk tolerance. There's no guarantee that you will make money, but a well planned portfolio should make you money while insulating you against losses if the market goes sour.

So, when you see the numbers that are flashing across the news, remember that they aren't the entire index and while they might seem scary, they aren't the full story.

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What do the Index Numbers Mean?

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