Inflation is defined as “a general rise in the cost of goods and services and a fall in the purchasing value of money.” Inflation has devastating effects on our clients’ savings and investment accounts, and they should understand that inflation is the “why” behind our advice to allocate a portion of their core assets to equities.

Dr. Jeremy Siegel of The Wharton School conducted a study on North American investment returns since 1802 and found that large companies returned an inflation-adjusted 6.6 percent. That number has been over 11 percent since World War II. We must effectively explain that even a low 2 percent inflation rate erodes 18 to 45 percent of value over a 10- to 30-year range. One can quickly see that the inflation threat needs our top attention.

How can we best communicate this to our clients and prospects? 

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

Graphs and charts are uninspiring, and their eyes will glaze over. 

I have a graph that shows the loss of purchasing power over time. It is accurate but lacks any real-world application. Instead, I like to show clients a 50-year-old postage stamp — first-class stamps cost six cents back in 1971. Today, that same stamp costs you 55 cents!

In 50 years, postage costs in the U.S. went from six cents to 55 cents. This is about 4.5 percent and is a bit higher than overall consumer inflation of about 3.9 percent. It is a great example and is immediately embraced by clients. This is a simple, fun and memorable way to communicate inflation to clients. Complete the thought by connecting Dr. Siegel’s study returns of 6.6 percent less stamp inflation of 4.5 percent, and we get an expected real return of over 2 percent, compounding toward our clients’ long-term goals!

The question for clients is, How many stamps will 55 cents buy 50 years from now? It is highly likely that 55 cents will buy only a small fraction of a stamp in 50 years. 

If you show your clients stamps as a proxy for an inflation graph, they will get it. Clients will remember this example, even many years later.

Revise your visuals by having a card printed that shows stamps and explains the rise in costs over time. Peaks and valleys comprise our market averages. These swings are an organic part of the investment process. Clients will instinctively try to retract from any perception of harm and must be reminded of the stamps occasionally. They must not lose faith in the data.

Explain averages with this comparison: If in one hand you hold a snowball and in the other a very hot potato, on average you should be doing good; however, you would not be very comfortable! The point here is that we must recognize that the equity allocation pursues a long-term average and will not be all that comfortable at times. It’s those times that we achieve our highest value to our clients. Recognize that these swings are normal, that we trust the long-term data and that any “comfort” adjustments or structural changes to clients’ allocations are best done during market stable periods rather than under duress when markets may be volatile.

Use an image of a staircase to shift the focus to the long term. The staircase represents the long-term market performance (6.6 percent). Now visualize a person walking up those same stairs while playing with a yo-yo. The yo-yo 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 is great for a client who gets nervous because of market drawdowns or the crisis du jour. Remind them of the staircase and the yo-yo.

As advisors, we can quickly recognize that the greatest risk of the equities markets, long term, is not the dips and corrections. The greatest risk is not being in them!  

How can we best communicate inflation to our clients and prospects? 

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

Richard Dobson Jr., CFP, is president of American Financial Management, a registered investment advisory firm. He is also an officer of American Financial Securities and has served on numerous MDRT committees.