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Market Returns: The Risk In Expecting The Unexpected.

There are two types of investment returns that we experience in the global stock market: long-term “expected” returns, and short-term “unexpected returns.

When I initially meet with clients, I often go over the three basic components of stock returns: income, growth, and price change. Income is typically represented by the annual dividends that are paid to shareholders, and growth represents the long-term appreciation of the stock value as company earnings are reinvested for expansion of capacity and the addition of new product lines. Expected returns are primarily based on these two predictable sources – and the longer your time frame and the more diversified your stock portfolio, the more predictable they become.

Unexpected returns are much more volatile and short-term in nature. When someone tells me that investing in the stock market feels like gambling, I know their focus is primarily on the short-term nature of unexpected returns seen as daily price changes in the market. When viewed on a daily, monthly, or even annual basis, this aspect of investment returns is often the “tail that wags the dog,” and it’s easy to get distracted from the long-term as a result of this volatility. From a daily news standpoint, no one wants to talk about long-term expected returns…that’s boring. Excitement is found in the news-worthy, short-term unexpected returns. The problem is, when unexpected returns are talked about as if they are now expected returns, investors get caught up in the notion that “it’s different this time” or this is the “new normal.”

Our financial advisors take a disciplined and evidence-based approach to investing, focused on structuring diversified portfolios that seek long-term growth results for our clients.

Take a more in-depth look into our investing philosophy here, or reach out to Paul to learn more.

Here’s the truth of the matter: Unexpected returns will always be with us, and if you’re only focused on investing for the short-term, then unexpected returns will make or break your investment experience. Social unrest, political change, pandemics, taxes….you name it – it has all happened before, and it will all happen again. However, nothing has fundamentally changed in regard to expected returns. Stocks represent ownership in corporations, and those corporations are in the business of staying in business through long-term growth and innovation – regardless of what is currently happening in the world around them.

One of my most important roles as an advisor is to help my clients mentally and emotionally process the impact of unexpected returns on their portfolio from year-to-year, while never losing sight of their long-term financial goals and the expected returns that will get them there, if they stay the course.

Paul Hansen, CFP®, CPA

Financial Advisor, HFG Trust


This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Community First Bank, HFG Trust, and HFG Advisors have no duty or obligation to update the information contained herein. Further, Community First Bank, HFG Trust, and HFG Advisors make no representation, and it should not be assumed that past investment performance is an indication of future results. Moreover, wherever there is potential profit there is possibility of loss. This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services, banking services, or an offer to sell or solicit and securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources. Community First Bank, HFG Trust, and HFG Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. This memorandum, included the information contained herein, may not be copied, reproduced, republished, or posted in any form without the prior written consent of Community First Bank and/or HFG Trust and/or HFG Advisors. HFG Advisors, Inc, is a wholly owned subsidiary of HFG Trust, LLC. HFG Trust, LLC is a Washington state-registered Trust company and wholly owned subsidiary of Community First Bank.