Last Updated on June 17, 2026
Overview – Should You Care About What a Market Index Does?
How many times have you gone onto a financial news outlet and read how people are decrying an impending market crash, simply because indices were down that day, or at least have been down for an extended time?
Or, on the other hand, how many times have you seen a major market index, or a handful of major ones, post impressive gains, and people immediately talk about “buy now before it’s too late!”, or “a new boom is now upon us!”
Chances are, you’ve seen these scenarios on multiple occasions, and it can be quite agitating to see people constantly flip-flop between pessimism and optimism based on a single, arbitrary metric. Given this observation, it’s only natural to ask, “If other people are concerned about a given market index and its movement, should I be too?”
Let’s find out.
A Reminder of What a Market Index Is
Before continuing, it’s important to remind ourselves what a market index is. This is something we’ve already covered before, but to summarize, they are essentially a basket of stocks that represent a specific industry or part of the broader financial markets.
For example, the S&P 500 comprises the 500 largest corporations in the United States and is widely considered an indicator of the U.S. financial markets’ health. Whenever the S&P 500 reaches all-time highs or lows, people are quick to associate that movement with the health of the U.S. financial markets (or, for some people, the entire economy) at any given time.
Market indices are also used to guide the portfolio composition of an index fund (hence their name) and serve as a litmus test for the broader economy (the relationship between the economy and financial markets is something we’ve also analyzed before).
So, having said these things, it sounds like paying attention to market index activity is a no-brainer, right? The answer isn’t as straightforward as we may think.
The Movement of a Market Index (Or Indices) Won’t Always Apply to You
Let’s get straight to the core of our overarching question. The investors who stress themselves out over market index activity are the ones who think that what happens in the world of market indices is a direct reflection of their own portfolio(s).
They think that just because the S&P 500, NASDAQ, TSX Composite, Nikkei 225, or any other indices they choose to follow move up, down, or sideways, their portfolios will move the same way. It doesn’t take much thought to quickly debunk this.
What these investors seem to forget is that although market indices represent broad strokes of the financial market, they don’t represent all of it. Even the most comprehensive indices, such as the NASDAQ Composite, only contain a relatively small portion of the thousands of equities that exist. Additionally, and arguably the most important point, is this: why should investors care about what a given market index is doing if that index doesn’t have any of the equities they personally own?
If an investor’s portfolio is comprised of small-to-medium-sized, international enterprises, why should they care about what the S&P 500 is doing, given that it’s a market index that tracks 500 of the largest American companies? To take this further, why should investors care about indices of countries in which they have no investments?
Most investors have no problem understanding what market indices are and how they work from a technical standpoint. The persistent issue many of them have, however, is failing to understand that these indices and their portfolio(s) won’t always have significant overlap, and in some cases, may be mutually exclusive.
So, the next time a market index decides to act up and the temptation to get jittery starts to take over, investors would be wise to stop and ask how much commonality the index and their portfolio(s) truly have.
Market Indices Are Important, but Don’t Overestimate Them
After having discussed the issue that some investors face when following market indices, it may sound like they aren’t as important as originally believed. Some may even take it a step further and suggest they aren’t worth following at all. So, what exactly is the verdict?
Taking into account everything we have discussed so far, the verdict we will propose is this: market indices can help investors get a quick, big-picture understanding of a given country’s financial markets, but should not be given any more importance beyond that.
A common application of market indices is international investing. When looking for different countries to deploy their capital in, most investors will most likely want an easy, “lay of the land” assessment before deciding to investigate a country’s investment prospects further. After all, nobody wants to spend precious time and energy assessing a country’s investment worthiness only to discover it isn’t worth pursuing.
This is where market indices prove extremely helpful. By studying how certain indices have historically performed, investors can get a rough idea of how a country’s financial markets are doing. Based on the specific indices they choose to look at, they can also glean how specific industries in a country are performing.
Imagine you want to invest in the ASEAN bloc, but you struggle to figure out which country(ies) within the bloc you want to deploy your capital to. By comparing market indices between the 11 ASEAN countries and studying their historical performance, you quickly gain a rough understanding of how each country’s financial markets are doing before deciding to investigate individual countries and their nuances more closely.
Beyond a bird’s-eye view of a country’s financial health, the utility of a given market index starts to decline based on things we discussed earlier in this article, such as the fact that a market index won’t always reflect how your own portfolio is doing.
For example, after having looked at the Philippine Stock Exchange Composite Index (PSEi), you decide to further investigate the Philippines; after performing more in-depth research into the country’s prospects, you decide to invest in it.
Although the PSEi is comprehensive, chances are your portfolio won’t consist of every equity in the index (unless you want your portfolio to mirror its performance and create a mini ‘index fund’), meaning the daily swings of this index aren’t a major concern to you.
So, are market indices and their movements important? Yes, but beyond a certain point, their utility drops precipitously.
Wrapping Up
Market indices are a common tool in the investing world. As such, many investors understandably pay attention to what they do. However, the question they face is how much attention market index activity truly deserves.
A common mistake some investors make is thinking that how a given market index moves is also a reflection of how their own portfolios are doing. In doing so, they fail to remember that market indices only represent a portion of a broader financial market, and that their specific portfolios may have very little commonality with any major market index, rendering comparisons between them futile.
That being said, market indices still have their uses, such as giving investors a quick, big-picture understanding of a country’s financial market health. However, beyond this broad view, investors will want to be cautious of giving market indices more attention than they deserve.
