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Nice title but dubious message

I like to uaeuse declarative titles for charts. This chart below, found in an investment magazine published by Charles Schwab, wants to tell us that emerging markets "perform differently."


That is a nice concise message. Now, what does the chart say?

Readers have to jump through some hoops. First, the axes are flipped from their normal posture. Time typically is shown running horizontally. And market returns which range widely from positive to negative values are frequently displayed vertically. But not here.

Second, this chart equally treats all three categories of equity returns (domestic, international developed markets, international emerging markets) when the title draws attention to emerging markets. In fact, emerging markets is placed last in the legend. Try blocking the top section, just staring at the grouped bar chart -- the emerging markets do not jump out.

Third, we are asking ourselves what the designer/analyst means by "performing differently." The most obvious difference is the blue spike corresponding to the 79% return in 2009. But in many other years, the blue bar is not obviously different.

One way to interpret "perform differently" is that the emerging market returns exhibit low correlation with the returns in either domestic or international-developed markets. (Such a finding would be helpful to investors looking for diversification.) The scatter plot can be used to examine correlations.


The pattern is surprising. The chart on the left shows that emerging market returns are highly correlated in a linear way with international devleoped-market returns. The chart on the right shows that domestic returns are less correlated with emerging market returns but the correlation is still pretty strong.

There were two unusual years, one (2009) in which emerging markets did quite a bit better and another (2013) in which emerging marketss did quite a bit worse.

These observations imply that the data do not really support the title of the original chart.



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Behind the poor conclusion and confusing graphics is, not surprisingly, money.

Financial firms do a good business these days in managing portfolios. So, for example, if JP Morgan Chase manages your assets they might charge you 1% per year for the service of switching you from one mutual fund to another [with the mutual fund management fees in addition to this]. So, if you have a retirement portfolio of $2 million, you are paying them $20,000 a year to do this. [I don't know how much Schwab attempts to charge.]

Fundamental to this is convincing you that (a) performance among different large sectors is different, and (b) assuming part a is true, that they have some idea what the sectors will do in the future.

In the quest to do this convincing, you want graphics which show your point, NOT necessarily graphics that communicate truth.

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