The Andex Chart – what it means to you and me
I was cleaning out the garage this past week and came across an old rolled up chart of mine called “The Andex” chart. It was a chart that I had hanging up on the wall of one of my offices some years ago…it is the same chart that you will see in every financial institution in North America…
The link below will take you to an “online” version of The 2007 “Andex Chart” for investors.
It packs a ton of information into a very compact amount of space…it illustrates the various stock, bond, real estate, cash and gold markets and indexes from 1950 to present…
Why am I telling you this?
Well, because it gives a fascinating view of the history of the world and the various markets that make up our lives…and that create wealth for us…
And though I frequently refer to it in client meetings, today I thought that I would share with you “online” what it is all about…
Now, the “Internet” version does not give the best magnification or clarity so I will walk you through some of the more notable elements…
At the outset, and after distilling all the information that is summarized as well as 22 years in the financial services industry, what I, and others in my profession endeavor to do is to position your investments in a way that makes sense relative to your specific “risk profile”, time horizon,
financial circumstances and objectives.
The reality is that everyone wants to get the highest return on invested money – while at the same time – taking the lowest risk.
This “balancing act” is the biggest challenge we all face!
Now, while the Andex Chart does not tell us what the future holds we can take some educated guesses based on what has happened in the past…
So, for you to see and understand what it is that I and others in the financial services profession use this chart for – here are the basic insights that come from this chart:
Some things are immediately evident such as…
That if one takes some investment risk, one is reasonably likely…over the long-term…to achieve a superior investment return over “risk-free” investments, such as Guaranteed Investment Certificates (GICs).
The orange line, showing the return on Guaranteed Investment Certificates (GICs) is nice and smooth…no “loses” here…
The red line, showing the Toronto Stock Exchange Index (TSX), and the blue line, showing U.S. stocks are quite jagged.
This emphasizes the fact that the price of trying to get a superior return over risk-free investments such as GICs is that one will often go through those inevitable periods of time where one is “losing money”.
The chart illustrates world events and markets action – and reaction to them from 1950 to 2007…that’s 57 years…
Over the past 57 years inflation has averaged 3.9%. (The pink line). See where in 1950 something costing $100 will now cost $919 – 57 years later!
Over the past 57 years, 5 year bank GICs have produced an investment return of 7.2%. (The orange line) $100 invested in bank GICs will now be worth $5,415 – 57 years later.
Over the past 57 years, long term bonds have produced an investment return of 7.5%. (The green line) $100 invested in bonds will now be worth $6,387 – 57 years later.
Over the past 57 years, the Toronto Stock market (TSX) (The red line) has rewarded investors with an investment return of 10.9%. $100 invested in the TSX will now be worth $37,800 – 57 years later.
Over the past 57 years, a US index called the Standard & Poors 500 (S&P500) has rewarded investors with an investment return of 12.0%. (The blue line) $100 invested in the S&P500 will now be worth $68,250 – 57 years later.
The “recessions” for both Canada and the US are illustrated by the vertical bands of grey and happen fairly regularly every 7 to 10 years – its just part of our economic cycles…
So…the conclusions are that we can reasonably expect to get a “risk-free” investment return with GICs that will exceed inflation by approximately 3.5% over the long term…
On the other hand, assuming slightly more risk with bonds will have produced annual compound returns of 7.5% and with a little more risk the Toronto Stock Exchange (TSX) will have produced annual compound returns of just under 11% and U.S. stocks have produced annualized compound returns of 12% over the past 57 years…
Can you see the best and worst investment – over time?
However, most investors to not invest in “the indexes” alone and so the broad based market indexes are not necessarily the best way to judge the performance of your personal portfolio of either hand picked securities or of ones mutual funds.
As you can see, while the “stock markets” do in fact fall from time to time – it is the “bond markets” that show strength during these times!
This illustrates 2 different asset classes – non correlated to each other – responding differently at these points in time…
Knowing and understanding this then suggests that one should at least have both asset classes in ones portfolio.
Though bonds may lag in investment returns during growth in the economic cycle – they do provide a cushion in the portfolio in the years when the markets “turn south”…
Good investment management consists of coming up with an asset allocation strategy (as in determining how much money should be in low risk, medium, and high risk investments, and so on), and
adjusting the strategy, along with changing circumstances as time goes by…
In addition, the chart points to the frailty of human nature.
If, one chooses (as part of one’s asset allocation process) to invest in higher risk investments, one has to be prepared for the inevitable volatility (and, to be somewhat philosophical when one’s investments are losing value).
Buying high and selling low is a tough way achieve long-term, mid-term, and short-term financial goals…
Be a “contrarian” and invest when markets are low – then sell when they are high.
It’s a simple formula to make money…and one that can be successfully achieved because the long term direction of “the markets” is up!
However, it is simple human emotion that often gets in the way and derails the investment program…
Here is a perfect example:
Let’s say that at the market peak in January 1, 1973 you were fearful about “being left behind” and invested $100,000 into the S&P 500 index (U.S. stocks) (The blue line)
1 Year, 9 Months Later…you open up your investment statement and find that your investment is now worth $57,378!
That’s a decline of almost 43% in 231 months!
At what point do you think most investors would have thrown in the towel?
Well, for the one who threw in the towel, they would have taken the $57,378 taken from the market and reinvested in a GIC at 5%…
10 years later…$93,463
However, what would have happened if you had kept your $57,378 invested instead of fleeing into cash?
10 years later…$244,437!
That’s almost $151,000 more for the patient, disciplined investor!
Are you a patient and disciplined investor?
The real message delivered by the statistics shown on this chart is that interest rates, performance of a given stock market, the relative performance of different stock markets, the movement of currencies and, virtually, all other economic results are extremely difficult to predict.
Therefore, rather than trying to predict where the markets will go – get a group of assets working for you that provides enough protection if things go badly, and enough opportunity when things are going well.
Finding this optimum allocation, of course, always remains a challenge.
Sir John Templeton was well known for one of his most famous quotes – “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
Another facet of Sir John’s investment approach was to ride out the market’s short-term movements to attain long-term gains. He always believed that holding a security over a five-year period meant that he did not need to listen to the day-to-day noise in the market place…
Sir John wouldn’t have flinched in today’s stock market environment!
Instead, he would have said that “just because a stock’s price has dropped, it doesn’t mean its value has evaporated.”
I had the good fortune to meet the legend in the Bahamas over 14 years ago and I asked him then to summarize his investing philosophy.
He smiled warmly at me and began by saying:
“I believe that the more chances investors get to buy shares of quality companies when they go “go on sale” – as they do from time to time – the better off they will be in the long term”.
“In the short to intermediate term, the market is unknowable. In the long term – it is inevitable.”
“Picture if you will, the market as a child riding up an escalator while playing with a yo-yo. If you watch the yo-yo, you’ll see nothing but volatility.
The “secret” to successful long-term investing is to focus on the escalator, not the yo-yo.
I don’t know which direction the next 20% move in the market will take.
But, I am absolutely confident and certain about which direction the next 100% more in the market will be”…
And with that – my time with Sir John Templeton was up!
Now, sit back in your chair and look at The Andex chart again – it represents what Sir John was telling me…http://www.andexcharts.com/c_ewall.htm
Sir John Templeton’s words were as true then – as they are now!
It is all about confidence!
Never lose sight of your goals and dreams – and never, NEVER lose your confidence and give up.
The fact should not be lost on you that he spent his whole life helping people attain their financial goals…
He spent his whole life creating the investment vehicles and investment philosophy that guided him and thousands of investors successfully to a better and richer financial world for themselves and for their families!
So, let’s all promise to embrace his investment philosophy…because after all, he would have wanted you to become wealthy!
This Andex chart presents a fascinating look at Canadian real estate…
Canadian Real Estate Andex Chart
Now, just because you read an article such as the following “City House Price Shock” you don’t run and put a “For Sale” sign on your lawn do you?
Of course not!
Because you are a patient and disciplined investor – right?
Remember, it’s time in the market – not timing the market where you will make money.
This applies equally to all markets…be it: real estate, stocks or bonds…
Check out another resource that I want to share with you…
This video that I made represents the various asset classes and their historical returns. Just “click” the link below to begin viewing…
About The Author
Mark Huber is a is a full time certified financial planner (CFP).
Mark has distilled 22 years of insights and experience in the financial services industry into “The UnCanadian Way” series of eBooks, audios and videos.
For the latest: “How To Get Rid Of Your Mortgage – The UnCanadian Way”
2008 Mark Huber
This article may be freely distributed if this resource box stays attached.
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