Advisor says: “Diversification is a key means by which to reduce portfolio risk.”
Client hears: “You are feeling very, very sleeeepy.”
Let’s face it: Subjects like diversification, compounding, and volatility may stir the spirits of finance nerds, but to most folks they’re as good as sleeping pills. The problem is, understanding these topics is critical to an investor’s success–and to their expectations of you as an advisor. So, how do you get dry but important messages across?
Enter the Big Picture chart. The Big Picture chart uses the power of illustration to bring investment principles to life. Rather than slog through a lecture, the chart allows investors to learn visually–and quickly. The chart covers all the major concepts, from risk vs. return, to the dangerous effects of inflation, to the relationship between historical events and market performance.
Which brings me back to the advisor who is trying to communicate the importance of diversification. Wisely, he pulls out a copy of the Big Picture chart, and points his client to the “Balanced Portfolio” trend line. It’s instantly clear that throughout the history of the modern stock market, a diversified portfolio has been far less volatile than equities alone. When equities have fallen, the Balanced Portfolio has always fallen less. Lesson learned.
The advisor’s next client is worried about an impending recession and wishes to liquidate her holdings. The Big Picture chart can help here, too. The advisor uses the chart to launch a two-pronged argument. First, he reminds his client that the future cannot be reliably foretold, no matter how authoritative the foreteller. The advisor notes the following captions in the Big Picture chart: One, which quotes Alan Greenspan as “unqualifiedly bullish” in January of 1973, just prior to a 40 percent market crash, and another, which marks the 1979 publication of Business Week’s “Death of Equities” issue, right before the market’s greatest bull run ever.
Second, the advisor points out that stocks have surged when people have least expected them to, leaving behind those on the sidelines. Pointing to the chart, he shows that in all but one of the past 14 recessions equities rallied–sometimes dramatically–before the recession ended.
His client is impressed, but still feels tempted to time the market. So the advisor turns to the chart’s “Danger of Market Timing” box, which illustrates the damaging effect of missing the best year of market returns in each of the past three decades. Then he points to the chart’s “Time in the Market” box, which shows that stocks have posted a positive return in 60 of the past 84 years, or over two-thirds of all years. The same box shows that from 1926 to 2009, stocks rose in 86 percent of rolling five-year periods, 93 percent of rolling ten-year periods, and 100 percent of rolling 15-year periods. The client agrees to reconsider her stance.
The Big Picture chart is the perfect conversation piece for a range of investment topics. We’ve written a free, three-page Conversation Guide that outlines two additional topics not covered above. Download it here.
Contact us to learn how our graphical tools can bring clarity to conversations about investing.
Prior to founding Investments Illustrated, Ryan McLean worked as an equity analyst at Morningstar, and as a business consultant in Mexico City.