RIA Chart Book: Q3-2017 Most Important Charts -

RIA Chart Book: Q3-2017 Most Important Charts

Oct 19, 2017Jeremy ParkinsonFinance0

Michael Lebowitz and I have produced a number of charts that have generated a lot of questions, comments, and shares over the last year. We decided that each quarter we will begin producing a “chart book” of the “most important charts” from the last quarter for you to review.

We have provided the links in most cases back to the original articles as well for further clarification and context if needed. We hope you find them useful and insightful.

Time To Breakeven

While individuals are inundated with a plethora of opinions on why the index is moving up or down from one day to the next, a portfolio of dollars invested in the market is vastly different than the index itself. I have pointed out the problems of benchmarking previously stating:

The index contains no cash

It has no life expectancy requirements – but you do.

It does not have to compensate for distributions to meet living requirements – but you do.

It requires you to take on excess risk (potential for loss) in order to obtain equivalent performance – this is fine on the way up, but not on the way down.

It has no taxes, costs or other expenses associated with it – but you do.

It has the ability to substitute at no penalty – but you don’t.

It benefits from share buybacks – but you don’t.

Furthermore, it is also not representative what happens to real dollars invested in the financial markets which are impacted by changes in inflation. The chart below compares the breakeven times for the nominal index versus an inflation-adjusted index and $100,000 investment into the index.

You will notice in the $100,000 portfolio that investors, once the impact of inflation is added, just got back to even after 16-years of their investment time horizon was lost.

The Real Value Of Cash

As I discussed in the “Real Value Of Cash:”

The chart below shows the inflation-adjusted return of $100 invested in the S&P 500 (capital appreciation only using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller’s CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves back to cash at a ratio of 23x.

I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970’s there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.