As an engineer, I worked with numbers every day. At times, a report or presentation required a graph, so with the magic of Excel, I’d create one to make a point. For one presentation, a supervisor wanted a pie chart to show 15 or so items, so the largest items would have the largest pie slices. He also wanted a legend with the titles and colors of each item, and for each “slice” of pie to have a leader line indicating the percentage. It took up a whole page. I didn’t like the pie chart; it was colorful but hard to read, there were too many “slices,” and you really couldn’t draw any conclusions from it.

While working on the What Would Dad Do? book series and the corresponding spreadsheets, I had to create graphics to show the difference between options or to illustrate a key point. Among the dozens of graphics, you won’t find a pie chart among them. Not because it brings back bad work memories for me, but because I don’t find them very useful when discussing money management. Showing your total housing expenses as the largest slice of the pie does nothing to help you make a decision. Sure, comparing your housing expenses to other expenses or the national average might be interesting, but the fact is that housing costs vary from place to place. And if you’re thinking of moving to lower your housing costs, that decision won’t come from a pie chart, but rather from a good old-fashioned budget that shows how your finances could improve with a move to a different place.

When visualizing financial data, I prefer either a simple line (or bar) graph showing values over time or a scatter graph that displays two factors at once, such as returns and volatility. Trends are easy to see in a line graph, while the magnitude of differences is clearer in a scatter graph. To me, anything fancier or more complicated isn’t necessary. The useless pie chart brings me back to the purpose of tables or graphs when reviewing financial data. Can the graph or chart help clarify differences, magnitudes, trends, or results?

Many websites use different types of graphs, including pie charts, but don’t assume a nice-looking graph provides insight. For example, on my brokerage website, they plot my portfolio returns against the S&P 500 or NASDAQ index returns. That makes no sense because if I wanted to build a portfolio to mimic the NASDAQ index, I shouldn’t compare it to the S&P 500. In my case, my portfolio is mostly an income-generating portfolio and won’t perform like either the S&P 500 or NASDAQ, so that chart is useless. But they also have a bar chart showing the estimated income payments by month. Now, that chart is valuable for seeing how the income will be paid out across the year.

Then there are charts that display data for easy visualization, but can be misleading. For example, a 2-bar chart that compares 1-Year, 3-Year, 5-Year, etc., fund returns to the benchmark index. At first glance, the fund appears pretty close to the benchmark for each period. When I saw the difference across all categories was ~0.6%, I assumed it was due to the fund's expense ratio. I saw the expense ratio is now 0.76%, and given that the fund invests like the benchmark index, it will probably perform about the same, minus the expense ratio.

Another fund showed the same bar chart comparing the fund to the S&P 500 index and displayed a significant difference of -3.5% over 10 years. The Y axis has lines every 5%, but you have to hover the mouse cursor over the bars to see the actual numbers and do the subtraction yourself to see the 3.5% difference. Another line graph shows the cumulative returns of a $10,000 investment, displaying the fund’s results against a “Lipper Mixed Asset Target Allocation Growth Fund Average,” whatever that consists of. Of course, over 10 years, the fund outperformed the “Lipper” average. The comparison to the S&P 500 in the bar chart is puzzling since this fund holds over 30% in bonds and shouldn’t be compared to the S&P 500 index, which has no bonds.

And finally, another fund’s webpage stated that the fund would deliver “income, build capital and manage downside risk using an active investment approach” with an expense ratio of almost 1%. The fund is in the “large value” category and holds 112 stocks. So why is the Russell 3000 Value Index used as the benchmark for comparison, when it has 2,284 stocks? Wouldn’t the Russell 1000 Value Index, with 898 stocks, be closer to the fund’s 112 holdings than the Russell 3000 Value Index? I’m sure the fund manager has a reason for the chosen benchmark (because it’s lower than the other index), but the fact remains that the fund performed 2% worse than the benchmark over the long-term (~1% due to the expense ratio) and provided only a 2.03% yield, compared with 1.83% for the index. However, the fund did better at managing downside risk in 2 of the past 10 years, dropping about 4% less in those 2 years. After looking more closely at the charts and doing a little digging on the Russell benchmarks (which took about 5 minutes to look up), an investor would be hard-pressed to consider that fund a better option than a plain Russell 1000 Value Index mutual fund or ETF, which have expense ratios of 0.2% or less and return 2% more over the long-term. Sometimes a graph can be used to obscure the truth that they would rather not have you see. And these distortions of the truth are common in the mutual fund industry - selecting a benchmark that shows a favorable comparison, closing or merging funds that lag in performance, and making it hard to understand the true expenses by owning the investment.

While I started this post by dissing the pie chart, the point to remember with any chart is whether it helps you understand differences, magnitudes, trends, or results, or whether the presentation is incomplete or misleading in some way. Fancy, colorful graphics are not always designed to aid the reader but rather to display information from the provider's point of view.

Learn more about investing in What Would Dad Do? - Volume 2: Investing and Climbing the Retirement Hill