The US Stock Market

The US stock market has performed exceptionally well over the past century. It has been fueled by unprecedented economic growth as new companies where established and thrived. As such the US stock market is the biggest stock market in the world comprising around 22% of the total global market. Simply purchasing the broad US stock market would be an investment that no one could fault you for.

To purchase the total US stock market an investor would simply purchase an index fund such as the Wilshire 5000. The Wilshire 5000 index was first created in the early 1970’s with a goal of tracking the entire market. As such it includes every stock that is headquartered in the United States and trades on a major exchange. Since 1972, an investment in the US stock market would have produced a compound annual growth rate of 11.08% with a standard deviation of 17.25.

When investing in an index fund that tracks the total US stock market an investor should be aware that they are mostly purchasing large cap stocks. The Wilshire 5000 index and most other index funds are market capitalization weighted indexes. What this means is that they include more of a stock as its market capitalization grows. Weighting an index this way allows the index to avoid excessive trading. However, it also means that as a stock gets more expensive it will represent more of the specific index.

Since large capitalization stocks have such a large weighting in a total market index they all tend to perform similar. For example the S&P 500 includes 500 large capitalization stocks and is one of the most commonly referenced indexes. Even though it only contains 500 stocks it has performed remarkably similar to the Wilshire 5000. Since 1972 the S&P 500 has a compound annual growth rate of 10.94% compared to the Wilshire 5000’s 11.08%.

The takeaway from this is rather simple. If you are attempting to track the overall US stock market understand that you are investing in a large cap index. There are many indexes available such as the MSCI US Broad market, Dow Jones Total Market, Morningstar Total Market, and Standard & Poor’s 1500. All of these indexes will perform very similar and as such it does not matter which you choose.