by Franklin J. Paker, CFA
The Summary
- Rhetoric around the Ukraine/Russia standoff has grown more intense. Biden and Putin held a call last week wherein Biden threatened severe sanctions should Russia invade Ukraine. With winter setting in in Europe, and natural gas supplies from Russia in doubt, there is only so much leverage Washington has to forestall a serious incursion. Furthermore, Ukraine is a bit of a test for the Biden administration. China will watch closely how the strain is handled and met.
- This week is a busy data week. Tomorrow we get the JOLTS Job Openings report tomorrow, and later in the week we get jobless claims, trade balance, and December’s unemployment report. All of these releases will be watched closely.
- Just to reiterate the big picture portfolio positioning: coming into late spring/early summer it may make sense to underweight risk assets (stocks, high-yield bonds, etc), and overweight defensive assets, as I expect a significant pullback. As I have said, I do not expect that pullback to be the end of the cycle, so it can be played tactically by nimble investors, or be used as a good entry point for investors with cash. In any case, your goals will govern what is an appropriate move for your portfolio.
The Details
With a new year and many people thinking about their goals and objectives, I thought it sensible to sketch out how investors should think about their investments.
Goals-based investing is all about using markets to achieve your financial goals given real-world constraints. In the goals-based framework, understanding your goals (“your world”) is as important as understanding markets (“the big world”).
We can classify goals by their role in your life. Much like Maslow’s hierarchy, our goals tend to range from foundational needs (things like food and shelter) to dreams (those things we’d like to achieve, but wouldn’t lose sleep over if we don’t).
This framework helps us to understand which types of investments go where. The bottom of the pyramid is where we buy insurance, the top is where we buy lottery tickets, and the middle is where we invest. By understanding what goes where, we can both better organize your financial life and generate better outcomes.
In a goals-based framework, risk is not volatility. Risk, in a goals-based framework, is the probability of failing to achieve your goal. This not only changes our own thinking about how to engage with markets, but also changes the math of asset allocation.
In the end, the goals-based framework aligns the mathematical theory with what it is investors are actually trying to achieve. And, by doing away with some of the absurd assumptions of traditional portfolio theory, we can treat markets as they are, not as we wish they would be. All of this serves to help you achieve your goals more often.
Chart of the Week
The Purchasing Manager’s Index gives us some insight into the health of US manufacturing. Anything over 50 is considered expansionary and anything under 50 is contractionary. As this week’s chart shows, US manufacturing has been in very strong expansion mode, though it has started to wane somewhat in recent months. Still, readings in the high 50s is considered very strong, and that strength is encouraging for continued economic growth.
This document is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, plan feature or other purpose in any jurisdiction, nor is it a commitment from Directional Advisors to participate in any of the transactions mentioned herein. Any examples used are generic, hypothetical and for illustration purposes only. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own financial professionals, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.