Wade Pfau has created a graphic comparing nominal and valuation-adjusted portfolio wealth. The graphic appears at an entry at his blog titled Valuations-Adjusted Wealth.

Set forth below are the words that I posted as a comment to the blog entry:

Thanks for providing that helpful graphic, Wade.

The red line is not flat. But it is a good bit flatter than the blue line. I think it would be fair to say that the red line is the blue line with the highs and lows cut off.

Judging by what has happened in the wake of earlier bull markets, it appears that the blue line will be dropping a good bit below where the red line stands today. It’s going to be important at that time that we help investors understand that their wealth has not been reduced by as much as their nominal portfolio values indicate. The more frightened people get, the less they will spend and the deeper into the Second Great Depression we will all go.

Rob