The memorable 3-minute inflation explanation

Inflation has devastating effects on our clients’ savings and investment accounts, and advisors must help them understand why it is a major factor behind our advice to allocate a portion of their core assets to equities.

So how can we best communicate the risk of inflation to our clients and prospects?

  • Keep it simple.
  • Make it memorable.
  • Have fun with it.

Don’t use graphs and charts. They’re uninspiring, and your clients’ and prospects’ eyes will just glaze over. I have a graph that shows the loss of purchasing power over time, but it lacks any real-world application. Instead, I show clients a 50-year-old U.S. postage stamp. A first-class stamp cost 8 cents back in 1972. Today, that same stamp costs 58 cents, which is a 4.2% average annual increase, a bit higher than the average annual consumer inflation rate of 3.9% during the same period. Clients immediately embrace this example because it is a simple and memorable way to show how inflation impacts a purchase to which everyone can relate. The question for clients is, how many stamps will 58 cents buy 50 years from now? It is likely that 58 cents will buy only a small fraction of a stamp in 50 years. 

Show your clients the stamp example instead of a line graph, and they will get what inflation can do to their nest egg. Revise your visuals by using a card that shows stamps and explains the rise in costs over time. Clients will remember this example even many years later.

Peaks and valleys constitute market averages, and these swings are part of the investment process. Clients instinctively will want to retract from any perception of harm, so they must be reminded occasionally about the stamp inflation example. They must not lose faith in the data.

Explain market averages with this comparison: If you hold a snowball in one hand and a very hot potato in the other, on average you should be feeling normal; however, you would not be very comfortable. The point is that the equity allocation pursues a long-term average that, at times, will not feel comfortable. But it is during those times that we achieve our highest value for clients if they recognize that these swings are normal. We trust long-term data and that any comfort adjustments or structural changes to clients’ allocations are best done when the market is stable, not under duress when markets are volatile.

A staircase is another image you can use to help clients focus on the long-term perspective. The staircase represents the long-term market performance. Next, visualize a person walking up those same stairs while playing with a yo-yo. The yo-yo moving up and down represents the short-term swings in the market. We all should focus on the staircase, giving little, if any, attention to the yo-yo. This illustration is a great reminder for a client who gets nervous during a down market or the crisis du jour.

As advisors, we must remind our clients that the greatest long-term risk of the equities markets is not the dips and corrections. The greatest risk is not being in them.

Richard Dobson Jr. is a 20-year MDRT member from Cedar Falls, Iowa, USA. This blog post was excerpted from the article “The 3-minute inflation explanation that clients will remember” in the July/August 2022 Round the Table.

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