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« Don't Buy and Hold; Buy and Re-Balance | Main | Raising Money-Savvy Children »
Wednesday
Feb082012

The Andex Chart

 

Imagine that in 1926 your great grandfather, being a very farsighted man, put $10 in an investment of small cap US stocks, and left it there for you to grow with dividends and capital gains reinvested until January 2012.  How much will that investment be worth today?  That is just one of the many questions that can be answered by referencing the Andex chart put out and updated annually by the Morningstar, the financial services company that monitors and evaluates mutual funds.

The Andex Chart is a fascinating compendium of economic and historical data crammed onto one chart.  The current chart depicts the annual returns of various assets overlaying a timeline from 1926 through December, 2011.   Sprinkled on the chart are dots depicting various historical events that may have affected those returns.  Here a dot represents the fall of the Berlin Wall; there a dot represents the Challenger disaster.  On the far left of the chart we see the effects of the Great Depression; on the far right the effects of the Great Recession from which we are still reeling.

Along the very top of the chart in bar graph form one sees the yearly and decade-long returns of various asset classes.  One can quickly see that the ‘80s and’ 90s were great decades for equities; the ‘00s were not quite so kind.  Right below that are line depictions of the terms of the various presidents with other lines representing which party controlled the House and Senate.

The center of the chart is where the bulk of the data is depicted.  Seven squiggly lines, for seven different asset classes ranging from small cap stocks to 30 day Treasury bills, begin at the far left corner and extend up to the right showing how each investment has grown over the years.  Throughout this section is where the various historical events are pin-pointed.  There are heavy black lines representing America’s wars.  There is a dot for the attack on Pearl Harbor; another for Japan’s surrender.  Among many others there is a dot for the Bay of Pigs, the Cuban missile crisis, Neil Armstrong walking on the moon, Kennedy’s assassination, Nixon’s resignation, Microsoft going public, Russia’s debt default, 9/11, and Lehman Brothers collapse.  Through it all, with minor downturns here and there, the squiggly lines continue upward to the right.

Near the bottom of the chart the prime rate is graphed.  Notable there is the fact that it spiked as high as 21% during the early ‘80s when Chairman of the Federal Reserve Paul Volcker got quite serious about fighting inflation.  That is understandable for right below the prime rate graph is the graph of inflation which shows it peaked at just over 15% about the same time as the prime rate peaked.  According to the inflation graph it now takes $12 to buy what one dollar bought in 1926.  Today the prime rate is about 3.25%, near a historical low.  Along the inflation chart is a dot at 1938 representing the year the National Minimum Wage Act was passed which mandated that employers were to pay their employees the princely sum of 25 cents per hour.

The last graph at the bottom is a blue chart representing how the price to earnings ratio for the S&P 500 stocks has varied over time.  The median price to earnings ratio for that index since 1926 is 15.6.  The current ratio of 15.5, using the previous 12 months earnings, is right in line with the historical median.

So, what is the lesson of the Andex Chart? One is that our country has endured a lot since 1926.  We have seen three major wars that cost thousands of lives and shook us to our core.  There have been other dark days with two major shock events that killed thousands more (the attack on Pearl Harbor and 9/11).  Another is that there have been a number of major economic shocks that have rocked our markets and frightened investors.  But, through it all those squiggly little lines just keep on going upward to the right.  Of course there have been some periods where they declined for a while, but eventually they recover and head upward again.  In spite of all the challenges this country has faced, those patient investors who have remained in the equity market have eventually been rewarded.  I suppose the main lesson for me is that we should never sell our country and its economic prowess short.  I realize that we as a nation are facing a number of serious challenges currently, but I suspect they are no more serious than the ones previous generations faced.  They survived and prospered; I suspect we will as well and that those squiggly little lines will continue upward to the right.

You can easily find a sample of the Andex Chart online and draw your own conclusions.  Oh yeah, your great grandfather’s investment;  today it is worth $160,550!

 

Fly/Drive Safely

8 February, 2012  

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    Retirementflightplans - Journal - The Andex Chart

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