Commentary: How's The Market Doing? Ask The Wilshire

Is this crazy stock market up or down so far this year? The Dow Jones industrial average is off 12%, but the tech-heavy Nasdaq composite index, despite a mid-March sell-off, is up about 13%. So what is it--bear or bull?

Investors want a good measure of the overall market so they can tell how their own portfolios are doing vs. the average. And the Federal Reserve cares because it worries that a rise in stock wealth is stimulating too much spending. Confusion over the market's condition helps no one.

Fortunately, there is a precise answer. Since Jan. 1, the market is close to flat--down 1.5%, to be exact. How do we know this when the most widely watched indexes have moved in opposite directions? By looking at the one index that tracks the performance of the entire U.S. stock market: the Wilshire 5000 Total Market Index.

The Wilshire 5000 is elegantly simple. It was devised in 1974 by Dennis A. Tito, who is chairman and CEO of Wilshire Associates Inc., a Santa Monica (Calif.) firm that tracks fund performance. The index measures the total market value of all publicly traded stocks in the U.S. Currently, that's more than 7,000 companies, from giants like Microsoft Corp. and General Electric Co. to mites that are one step up from trading on the pink sheets and bulletin boards.

The Wilshire 5000 is trading around 13,600 lately. Since each point currently equals about $1.16 billion in market cap, that means public companies in the U.S. are collectively worth about $15.8 trillion.

You can see why the Wilshire is Federal Reserve Chairman Alan Greenspan's favorite measure of the market. It emanates the clearest signal of the market's collective judgment of what companies are worth--and Greenspan, despite his warnings against irrational exuberance, takes the market's forecasting abilities seriously. Plus, the Wilshire 5000 reflects every last dollar of stock wealth.

Investment houses and the media have been slower than Greenspan to pick up on the Wilshire 5000. If it's mentioned at all, it's usually after the historic but unreliable Dow Jones average, the tech-laden Nasdaq composite, the large-cap Standard & Poor's 500-stock index, and the small-cap Russell 2000--each of which captures only a piece of the overall market. The Dow is particularly narrow. It covers only 30 blue-chip stocks. And it's a simple price average, so companies with higher share prices have inordinate influence.

Investors could do worse than to use the Wilshire 5000 as a benchmark for their performance. It has a little of everything. Wilshire Associates says that as of Dec. 31, the index was composed of 29% tech stocks, 25% consumer nondurables, 14% finance, 10% materials and services, 9% utilities, 5% capital goods, 5% energy, 2% consumer durables, and 1% transportation. General Motors Corp.? It's in there. JDS Uniphase Corp.? It's in there. The Wilshire trails the S&P 500 when large caps are strong and leads it when, as now, small caps rally.

SPREADING RISK. Of course, if you're strictly a tech investor, you're better off measuring yourself against a tech index. If you really like large caps, the S&P 500 is an ideal benchmark. And so on. But then you have to ask yourself why you're making sector bets in the first place. Modern portfolio theory says you earn the highest risk-adjusted returns by spreading your eggs among many baskets. Example: Is tech starting to splatter on the sidewalk?

Commentary: How's the Market Doing? Ask the Wilshire

The best way to buy the whole market is through an index fund pegged to the Wilshire. Vanguard Group offers the biggest, with $22 billion in assets. T. Rowe Price, Fidelity, Schwab, and Wilshire itself have ones, too. To be sure, in guaranteeing that you will never do worse than average, you're also guaranteeing that you will never do better. For many people--even long-time market losers--that trade-off is unacceptable. But even if the Wilshire isn't your guiding light, it's the right index to consult the next time somebody asks you: "How's the market doing?"

Before it's here, it's on the Bloomberg Terminal.