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Indexes 101

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Indexes 101

Let’s dive into what indexes are, and why people love them.

What is an index?

Simply put, an index is a method to track the performance of a group of assets such as the stock prices of publicly listed companies in a standardized way. A measures the performance of a specific market, asset class, market sector, or investment strategy and is used by investors to evaluate the performance of any one stock against overall market performance.

An index fund is an easy way to invest in multiple companies and stocks at once instead of investing in a single company or stock, allowing you to diversify your portfolio. By buying an index fund, you’re buying a small slice of the entire market. It also gives a quick overview of how the stock market is performing since it includes the best stocks in every industry.

The most popular index is the S&P 500 which consists of 500 of the biggest companies in the USA. The index has returned a historic annualized average return of around 10.5% every year since it started in 1957. Other indexes such as the AMKT crypto index measures the performance of crypto market

A brief history of the S&P 500

Introduced in 1957

During the first decade after its introduction in 1957, and reflecting the economic expansion in the U.S after World War II, the value of the index rose to slightly over 800.

Gradual Decline of '69

From 1969 to 1981, the index gradually declined to fall under 360 as a sign of high inflation.

2008 Recession

During the 2008 financial crisis and the Great Recession, the S&P 500 fell 46.13% from October 2007 to March 2009.

2013 Recovery

By March 2013, the S&P bounced back from the crisis and continued on its 10-year bull run from 2009 to 2019 to climb more than 250%.

COVID-19

The COVID-19 pandemic in 2020 and the subsequent recession caused the S&P 500 to plummet by nearly 20%.

2021 Recovery

The S&P 500 recovered during the second half of 2020 reaching a number of all-time highs in 2021.

In it for the long haul

Index funds have always been focused on the long-term game rather than short-term returns. Passively investing by buying and holding not only helps maximize returns over time but is also cheaper, reduces portfolio complexity, and helps save on taxes over time. They take away the stress that comes from having to cherry-pick which stocks you think will perform best. Long story short, indexes allow investors to buy a proportional share of the market rather than speculate on individual stocks and equities.

https://assets.website-files.com/61ee3e9748963b1210b857da/62976ab9594b2b499ff50305_sp-hdg.png
Chart from Axios comparing the annual returns between hedge funds and the S&P 500

Index fund investing has lowered the barriers of entry for anyone to benefit from the stock market:

  1. They making it easier for anybody to invest in a broad market index that averages market growth and compounds each year.
  2. They can help balance risk, as their potential gains and losses are usually (but not always) less volatile than those of managed funds.
  3. Anyone can invest and benefit without a ton of capital. It’s also easy to get started in since it doesn’t require a financial background or special degree to understand.

So what is a Crypto Index?

Crypto indexes are investment tools that track the performance of a basket of cryptocurrency assets. They offer investors a way to gain exposure to the cryptocurrency market without having to purchase and manage individual assets.

There are several types of crypto indexes available, each with its own methodology for selecting and weighting the assets it holds. Some indexes track the performance of the top cryptocurrencies by market capitalization, while others focus on specific sectors or regions.

One advantage of investing in a crypto index is diversification. By holding a basket of assets, an index can mitigate the impact of any single asset underperforming. This can be particularly important in the cryptocurrency market, which is known for its volatility and can be subject to significant price fluctuations.

Another benefit of crypto indexes is that they can provide a passive investment option for those who do not have the time or expertise to actively manage a cryptocurrency portfolio. Instead of constantly buying and selling individual assets, investors can simply buy into an index and track its performance over time.

It's important to note that crypto indexes are not without risks. The cryptocurrency market is still relatively new and largely unregulated, and the assets held in a crypto index may fluctuate significantly in value. It's important for investors to carefully consider their risk tolerance and do their due diligence before investing in a crypto index.

Overall, crypto indexes can be a useful tool for investors looking to gain exposure to the cryptocurrency market without the time and effort required to manage a portfolio of individual assets. They offer diversification and the potential for passive investment, but it's important to understand the risks involved and do your research before committing any funds.

The Alongside Crypto Market Index ($AMKT) is one such example of a crypto index.

Buy the entire crypto market in a single token.