The magic of storytelling for your business

Albert Einstein once said, “If you can’t explain something simply, you don’t understand it well enough.” I can’t agree more—especially when it comes to growing and protecting people’s nest egg. Unfortunately, in my 20 years in the investment industry, I’ve often sensed that I’m in the minority on this issue: Our industry seems to love making the simple sound so complex that many clients think we are speaking a foreign language.

That’s a problem because it breeds mistrust. In my experience, clear, relevant and relatable stories are what draw people in and can cement the foundations of long-lasting relationships. Maybe I’m biased—I’ve  been a storyteller since childhood, just ask my parents—but here are three stories I’ve been sharing with advisors to help them connect with clients concerned about various aspects of the current market environment.

Story #1: “Which lane is best?”

Source: FTSE/Russell, Bloomberg Barclays, MSCI and FTSE NAREIT. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

To a novice client, a capital market returns chart like the one above just looks like a bunch of lines and numbers that doesn’t, at first glance, answer the critical question, “So what does this mean for me and my nest egg?”

That’s why, when I talk about this chart with clients, I actually talk about highways. Yup, highways—specifically, highways that tend to suffer from a lot of congestion. For instance, in my hometown, that’s the Interstate 290 into downtown Chicago. No matter the time of day or weather, the traffic always backs up at the Harlem exit. As you approach the exit, the left-most lane miraculously begins to move a little faster. But that doesn’t last, because everyone is lured into the promise of the faster lane and tries to move into it, causing it to back up. I’m sure you’ve observed a similar pattern on highways in your own town; this is not a behavior that only us Chicagoans exhibit. The insightful lane-switching drivers’ lesson is that if they had exercised patience and discipline, and avoided the temptation to move out of their original lane, they would have experienced less aggravation and enjoyed a safer ride.

How does this relate to our capital markets chart? Asset class returns tend to be like traffic on a highway. In the world of capital markets, U.S. equities have been the left lane—they’ve been moving faster than the international equity lane. Many investors are tempted to move to the left to take advantage of the momentum in U.S. equities. The highway analogy can help explain in a much more relatable way than historical returns and theories of reversion to the mean why such portfolio shifts may not deliver the better experience or the safer ride to investors. Having the patience to stay the course and arrive at the destination in one piece with less aggravation is the point of diversification.

Story #2: “Would you drive a car without brakes?”

How many times this week (let alone this month and year!) have you been asked by a client, “Why do I need bonds in my portfolio? Interest rates are going up and I’m afraid I won’t make any money in bonds.”

If you’re like me, you’ve gotten that question at least half a dozen times in any given week lately. Here’s the chart and the analogy I use to help address it:

Source: Morningstar monthly max drawdown % for the Bloomberg Barclays U.S. Aggregate Bond Index (“Bonds”) & the Russell 3000® Index (“Stocks”) from 12/31/1989 to 3/31/2018. Indexes are unmanaged and cannot be invested in directly. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets.

If investors are tempted to add more equity at the expense of fixed income to their overall portfolio, it may help to remind them that one of the primary roles of fixed income is to offset equity volatility.  Not having bonds is akin to driving a car that only has a gas pedal. Such a car would be fine—and even lots of fun—when nobody else is on the road, the road is smooth, the weather is good, and you know where you are going. But let’s be honest: that rarely happens in real life. Most of the time we are stuck on roads like the Interstate 290’s Harlem exit in downtown Chicago.

How do you bring this back to your client’s portfolio? Equities typically act as the gas pedal in a portfolio and bonds serve as the brakes. The airbags are like your alternative strategies. In the same way that no one would ever drive a car with only a gas pedal, why would you have a portfolio with only stocks?

The biggest risk to a client’s return is their own behavior. As their trusted advisor, you can help guide clients toward an investment vehicle that is prepared for all scenarios—not just the dreamiest one.

Story #3: “Today’s U.S. equity market may be like a jelly doughnut.”

Do any of your clients press you to add more U.S. stock exposure to their portfolio and reduce their international exposure? Here’s the analogy that might help them help them appreciate the potential benefits of diversification—without using any investment lingo. It may resonate most with clients who have a sweet tooth.

Let’s pretend you’re a doctor and a 75-year-old obese patient comes in and you discover that his main diet is jelly doughnuts. Would you say, “Congrats on your great health!” or would you be the professional who advises, “You’re lucky to have survived this long on that diet. You need to add some vegetables to your dietary portfolio. Veggies may not taste as appealing or look as tempting, but they will give you a better chance at a longer, healthier life.”

In our view at Russell Investments, the U.S. equity market (highlighted in the center of the chart below) currently appears to be the jelly doughnut in many investment portfolios. Investments in developed and emerging markets would be your vegetables. The chart offers a slight twist on the classic quilt chart of asset class performance and illustrates the returns of various asset classes relative to the U.S. equity market.  So, any asset class that appears above U.S. equity outperformed for that calendar year, while any asset class that appears below U.S. equity underperformed for that calendar.  Are you your client’s doctor who can help them toward better health or their friend who tells them what they want to hear?  The chart also helps remind clients that it wasn’t that long ago when U.S. equity was not a very popular place to invest.

U.S. equities—Russell 3000® Index; International Developed equities—MSCI EAFE; Emerging Markets: MSCI Emerging Markets; U.S. Bonds—Bloomberg Barclays U.S. Aggregate Bond Index; Global high yield—Bank of America/Merrill Lynch Global High Yield Index; Global real estate—FTSE EPRA/NAREIT Developed Index; Commodities—Bloomberg Commodity Index; Global infrastructure—S&P Global Infrastructure Index. Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment. Indexes are unmanaged and cannot be invested in directly.

The bottom line

These stores are simple, visual, and easy to understand for a reason. Clients don’t want to know what you know as much as they want to know that you care. Communicating with them in a way that feels relevant and understandable will demonstrate your caring. So, go and develop your analogies. Tell your stories!

Disclosures:
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed or produced by MSCI.

Standard & Poor’s Corporation is the owner of the trademarks, service marks, and copyrights related to its indexes. Indexes are unmanaged and cannot be invested in directly.

Index returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Russell 3000® Index: Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

MSCI EAFE (Europe, Australasia, Far East) Index: A free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

MSCI Emerging Markets Index: A float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Bloomberg Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.

FTSE EPRA/NAREIT Developed Index: A global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

BofA Merrill Lynch Global High Yield Index: Tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or Eurobond markets.

The S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

The Russell logo is a trademark and service mark of Russell Investments.

Copyright © Russell Investments Group, LLC 2018. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.

RIFIS: 20486

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