Friday, November 26, 2021

Investment Objective and Risk Tolerance

Your Investment Objective is a guideline you have chosen to define your goals and help identify your risk tolerance. Risk tolerance is the level of risk of loss you're willing and able to tolerate while pursuing these goals. All investments involve some amount of risk, including the potential for the loss of principal. Generally, equities (stock-like investments) involve more risk than fixed income (bond-like investments). Equities may have the potential for higher returns but also have the potential for greater losses. The higher your risk tolerance and the longer your time horizon, the more you may want to invest in higher-risk investments. Your investment objective is a factor to help define the ratio of equities and fixed income in your account. Increasing the percentage of fixed income may reduce volatility but may also reduce your potential return.


Reducing your exposure to equities and volatility may also reduce the probability of meeting your investment goals. Currently, interest rates are historically low, and returns on fixed income are correspondingly low. Rising inflation erodes the buying power of money, making fixed-income investments even less attractive. Equities in your portfolio may serve as a hedge against inflation. If you think prices will increase, owning equity in companies raising their prices may help offset the impact of inflation.


Your investment objective can usually be found on the first page of your investment account statement. The approach I recommend is to choose an investment objective that strikes a balance between taking enough risk to realistically pursue your financial goals while also allowing you to sleep well at night. Consideration should be given to how well you're prepared to reach your financial goals.


I do not try to time or jump in and out of investment markets. I choose investments I believe may do well in the intermediate to long-term based on economic and market data, adjusting equity exposure to align with a client's investment objective. Moving towards periods of economic weakness, I may adjust equity exposure towards the lower end of the equity range. Moving into periods of economic strength, I may shift the level of equity exposure to the upper end of the range for a specific investment objective. Below are the investment objectives we use for our clients. Investors should regularly review their investment objectives to maintain alignment with their current financial goals and risk tolerance.


Aggressive Growth – 90% to 100% in equities.

Emphasis is placed on the potential for aggressive growth and maximum capital appreciation. This objective is considered to have the highest level of risk and is for investors with a longer time horizon.

For retirement planning purposes, this is generally appropriate for people with more than ten years until retirement and a higher tolerance for risk. An aggressive growth investment objective may also be suitable for those whose retirement assets are below target. 


Growth – 70% to 90% in equities.

Emphasis is placed on achieving long-term growth and capital appreciation. This objective is considered to have a moderate level of risk and is for investors with a longer time horizon.

For retirement planning purposes, this is generally appropriate for people not yet retired who have a moderate tolerance for risk. A growth investment objective may also be suitable for those whose retirement assets are below target.


Growth with Income – 50% to 70% in equities.

Emphasis is placed on modest capital growth. Certain assets are included to 

generate income and help reduce overall volatility. This objective is considered to have a moderate level of risk.

For retirement planning purposes, this is appropriate for investors in retirement who have a moderate tolerance for risk and whose retirement assets are on target.


Income with Moderate Growth – 30% to 50% in equities.

Emphasis is placed on current income, with some focus on moderate 

capital growth. This objective is best suited for investors with little need for capital appreciation.

For retirement planning purposes, this is appropriate for investors in retirement who have a lower tolerance for risk and whose retirement assets are above target.


Income with Capital Preservation – 10% to 30% in equities.

This objective is generally considered the most conservative investment objective. Emphasis is on generating current income and minimal risk of capital loss.

For retirement planning purposes, this is appropriate for investors in retirement who have a lower tolerance for risk and whose retirement assets are well above target.

Saturday, November 20, 2021

CAUTION! Speed Bumps Ahead

 We are in the middle of one of the seasonally strongest periods for equity markets, yet we have some potential speed bumps in the weeks ahead.

President Biden is expected to announce his pick for Federal Reserve Chairman before Thanksgiving. It is anticipated that he will either renominate current Federal Reserve Chairman Jerome Powell (R) or Fed Governor Lael Brainard (D). Many believe Chairman Powell has done an excellent job and should be renominated. Others think President Biden may choose Fed Governor Brainard as an appeasement to the more progressive wing of the Democratic party who may feel they were forced to capitulate on recent legislative issues. Both are highly qualified, and neither are expected to change the Fed's current path; however, any change at the Fed could cause a ripple through markets. I don't have any inside information, but if President Biden wants to make a change at the Fed, it may come after the market closes Wednesday, giving market participants something else to digest with their Thanksgiving turkey.


We're about to revisit the debt ceiling drama. You may recall that Congress approved an extension of the national debt limit in October. U.S. Treasury Secretary Janet Yellen has shifted her estimate of how long the government's debts can be paid from December 3rd to December 15th. We have never defaulted on a bond payment, and it is expected that after a period of public theater, Congress will again raise the debt limit. Defaulting on our debt is a low probability, high consequence event that could move markets as we approach a potential default. A default could result in missed bond payments, social security checks, and military payroll being delayed. Markets would have a dramatic reaction if the U.S. were to default on any debt.


After Thanksgiving, we can look forward to a potential government shutdown dominating headlines again. Congress did not pass the necessary appropriations bills in September to fund the government for the fiscal year, which started October 1st. Instead, Congress passed a (CR) Continuing Resolution to avoid a government shutdown. Congress must pass the required appropriations bills or another CR by December 3rd to avoid a government shutdown again. It is expected that Congress will opt to pass another CR, kicking the can down the road into next year. There is a risk that politics could come into play and force a temporary government shutdown. Markets do not like uncertainty or instability; however, the reality is that a government shutdown is not a permanent condition. Previous government shutdowns have not resulted in lasting economic harm.


After impressive 2021 market returns, many are sitting on significant taxable gains. With the threat of changes to the tax code, some may elect to sell into yearend to realize taxable gains in 2021. If we begin to see tax-related selling, I expect those funds to come back into the markets in January.


In recent weeks we've seen a rise in COVID cases again in thirty states and areas around the globe. As winter approaches, more people in colder climates are spending more time indoors. This week Austria reinstated a lockdown and mandated vaccination for their population. In neighboring Germany, there are broad restrictions for public transportation, restaurants, and other public venues. In some places, they are canceling holiday events. When asked about a lockdown in Germany, the German health minister said nothing could be ruled out. The rise in COVID cases has caused doubt in the expectations for global growth. Crude oil prices have fallen 4% to a six-week low. Growing economies have higher energy needs. If growth estimates are revised down, the forecasts for energy prices are also revised down. Although there is nothing good about rising COVID cases, the silver lining is that a slower global recovery will put downward pressure on energy prices and inflation concerns and could give the Fed more time to adjust monetary policy.


Do you remember that time when everything was good, and there wasn't anything to worry about? Neither do I. I don't have a crystal ball; I can't see the future or defy gravity. I expect we'll have increased volatility in the coming weeks as the political issues play out. The economy is in good shape, corporate profits have been better than expected, and earnings estimates have been growing. I don't worry too much about things that could cause short-term market gyrations. I'm watching for conditions that could lead to a recession. I don't see anything like that currently. I will continue to monitor markets and the economy and will keep you advised. Please call me with any questions or concerns.


Saturday, November 6, 2021

Economic Update - November 6, 2021

 A video version of this content is available on YouTube: Link to Video Podcast

An audio version of this content is available: Link to Audio Podcast

There was a lot of market-moving economic news this week. Wednesday, the Federal Reserve ended their two-day meeting and announced their plan to begin reducing asset purchases. The Fed has been buying $120 Billion per month in bonds, $80 Billion of US Treasuries, and $40 Billion of agency mortgage-backed securities to support the bond market through the pandemic. The Fed will reduce US Treasury bond purchases by $10 Billion and agency mortgage-backed securities by $5 Billion in November and December. It is expected that the rate of decreasing bond purchases will continue, and the Feds bond-buying program will end in the Summer of 2022. Chairman Powell indicated that adjustments could be made should economic conditions change. Chairman Powell reiterated that there is a higher bar for raising the Fed funds rate; raising rates is not expected until after the Fed has completed the tapering of their bond-buying program. Many believe the Fed will begin raising interest rates later in 2022 in response to increasing inflation pressures. The Fed has done an excellent job of communicating their intended path and not being surprised markets responded well.


Thursday, the Labor Department reported that weekly initial jobless claims fell by 14,000 to 269,000. This number was better than expected and marked a pandemic period low—March 14th, 2020, pre-pandemic initial jobless claims were 256,000.


Friday, The Bureau of Labor Statistics reported that nonfarm payroll employment rose by 531,000 in October, and the unemployment rate fell to 4.6%. This report exceeded expectations, and equity markets rallied to new highs. We are all aware of the labor shortages. Unfortunately, there is no end in sight. The most recent data shows that we have more job openings than human beings to fill them. When I was in business school, an economics professor commented that full employment was 5%. He opined that anyone who wants a job has one once you fall below a 5% unemployment rate, and anyone worth hiring has been hired.




Pfizer announced results from their clinical trial of its experimental Covid-19 pill. When combined with a low dose of an HIV drug called ritonavir, hospitalization or death were reduced by up to 89% among high-risk patients. On CNBC Squawk Box, the former head of the FDA, Dr. Scott Gotlib, said, “By January 4th, this pandemic may well be over, at least as it relates to the United States after we get through this Delta wave of infection,” he said. “And we’ll be in more of an endemic phase of this virus.”


With Congress contemplating infrastructure bills, and the possibility of the pandemic coming to an end, the labor market should remain firm.


Coming into October, there were those warning that markets were at risk of a significant sell-off. Inflation, the possibility of rising interest rates, the threat from higher oil prices, and a policy misstep from the Fed were all cited as reasons the bull market could end. All those risks remain, and I will continue to monitor the economic data. You should never be so confident in your investment outlook that you discount the risks. For now, I see solid corporate profits, a strong labor market, an accommodative Fed, and a potential end to the pandemic outweighing the risks. This past Friday, I adjusted the portfolio models during a scheduled rebalance. The most recent changes increased diversification and slightly reduced risk.

We are in a seasonally strong period for equity markets. Considering the solid economic data, we could see equity markets continue their upward trajectory into year-end. As I always say. I do not have a crystal ball; I can’t see the future nor defy gravity. I can monitor markets and economic conditions and keep you informed. Please call me with any questions or concerns.