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What I Care About This Week | 2022 Jan 3

Photo by Brett Sayles on

by Franklin J. Paker, CFA

The Summary

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.

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