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.
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.
Financial Advisor, HFG Trust