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Defining the End Goal
We have to define what it means to have “enough.” But how does that square with continuing to build wealth?
Daniel Lancaster
December 09, 2024
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“Strange that with all my knowledge this secret had escaped me!
But it had, unquestionably.
I had known much pleasure, I had had an insatiable appetite for pleasure. I had found pleasure in many directions, few of which could be accounted wholly unworthy; but I saw now that the distinction between pleasure and happiness was wide and deep.
Happiness had an element not discernible in pleasure, a quality of depth, of completeness, of unassailable tranquility.”
-The Autobiography of a Mind by Rev William James Dawson (1925)
NEWS
What Happened Last Week
France’s government, led by Prime Minister Michel Barnier for only three months, was ousted Wednesday by a vote of no confidence. President Macron faces the need to appoint a new Prime Minister.
South Korea’s President briefly declared martial law on Tuesday, claiming that a refusal to vote on the 2025 budget made them vulnerable to attack from North Korea. This extremely unpopular move caused the legislature to make a motion to impeach the following day.
The US PMI Composite, which weighs the proportion of companies which report positive vs negative growth in activity, demand, and supply chains, came in at the highest number in the last three months: 54.9.
European PMI Composites were less encouraging, overall indicating decline.
The US added 227,000 jobs in November, beating expectations while also being well ahead of October’s meager report that was dampened by hurricanes and job strikes.
Investor sentiment remains cautiously optimistic, ranging between neutral and slightly bullish, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
Europe’s numbers aren’t looking great, exacerbated by what’s going on in France.
On the other hand, America appears to be pulling through and showing improvement. Even broad-based improvement across the economy!
But of course, in a global world, international trade matters. What happens to one part of the world affects the rest. So will America’s momentum be able to materially impact global growth, or will it encounter resistance due to falling external demand?
The Federal Reserve considers an extensive array of factors when making decisions. But up until now, to me they’ve seemed too eager to reduce interest rates in the midst of a healthy US economy.
After seeing November’s numbers, I think I know at least one reason why.
In a global economy that was more or less experiencing positive growth indicators, I do believe it would make sense for the Fed to hold interest rates higher for longer.
But in the current state of less than exciting news across the world, it might make sense to give America a greater boost in economic strength to counteract the potential friction down the road.
That said, the numbers above don’t tell the whole story. PMIs only weigh and translate the proportion of companies that reported growth vs decline, but do not consider the magnitude of either. So theoretically, we could still see positive healthy growth even with PMIs below 50. That would mean the health of the fewer growing companies outweighed the decline in the larger number that struggled. Not ideal economically, but also not entirely bad for markets.
When all is said and done, I think investors are optimistic but not unreasonably so, and that bodes well for future growth.
I still believe we may be headed for a market correction sometime next year, but not one which is extensive enough to lead to a bear market. Overall, I expect 2025 to be a double-digit year by the end.
PARADIGM SHIFT
Defining the End Goal
There is a popular children’s story called The Fisherman and his Wife.
The fisherman catches a golden fish while casually fishing one day. But like a genie, this golden fish speaks and offers to grant him any wish he would like.
The humble and content fisherman kindly mentions he has need of nothing, and thanks the golden fish as he releases him back to the sea. But when his wife learns of the missed opportunity, she scolds him and demands he ask for a new washtub. They need one after all! And so the fisherman complied.
But it didn’t stop there. One wish fulfillment led to the desire for another.
She went on to demand a new cottage, then a palace, and then to be made royalty. Finally she asks to become equal with God. At that moment, everything she’s asked for up to this point is taken away, and her old condition returns as though nothing had happened.
One interpretation might be that she was punished for her impudence of asking to be like God, and all that she had was taken away. A secondary interpretation might be that God embraces humility and simplicity, which is why a humble cottage with a broken washtub is exactly like a place where God might choose to live on earth.
I believe this story has a lesson for all of us.
We have to define our end goal. We have to define what it means to have “enough.”
It’s good to pursue progress. And it’s good to grow wealth.
But it must stem from the position of 1) contentment and 2) service to others.
In the early years of wealth building, the main “why” tends to be simply to acquire a comfortable lifestyle. Avoiding stress and uncertainty is a major motivator. Once the comfort has been established, however, it becomes more important to work for meaning, personal growth and a larger cause.
Think Maslow’s Hierarchy of Needs.
That’s why I believe it’s important to define exactly what your perfect life looks like.
Can you describe in detail your perfect day?
Your perfect environment, routine and situation?
Can you imagine it enough that you would recognize it when you acquired it?
In the pursuit of wealth, not having a clear “why” means that a person never actually arrives, regardless of how much they acquire. And the risk is that they look back on life and wonder why they ran so hard, had so much, but felt so empty.
Once you obtain this “enough,” you can then switch gears from working mainly for money into working for a higher purpose. And usually both of these come as a package deal.
Here’s a bonus! My sister sent me this podcast during the week which happened to line up so perfectly with this idea. I’ve had a long and deep respect for both Dr Huberman and Morgan Housel, so listening to them come together and discuss money on this podcast is a treasure! Give it a listen if you like.
FINANCIAL TOOL
Defined Outcome ETFs
Speaking of defining “enough,” let’s examine a type of investment that protects downside but limits upside.
Some need to make large returns but don’t want to take the risk.
The problem with this is that, even though they need to stay disciplined to an aggressive strategy, their emotions can get in the way. It often leads to timing the market and doing the opposite of what’s optimal: buying high when markets are “good” and selling low when everyone’s scared.
Discipline based on knowledge is key. But it’s easier said than done.
Is there a compromise investment for someone like this?
A Defined Outcome ETF is a strategy that is typically bought for a 12-month period.
There are a number of ways it can be structured, but it typically features some degree of downside protection through the use of option strategies.
Simultaneously, the upside is generally limited to a maximum gain.
Someone totally risk averse could use a strategy that targets complete downside protection, but this is usually going to come at a low upside cap that averages something more akin to a bond strategy (possibly a bit more in good markets).
But if someone’s looking to protect 10% of the downside, or some other range or figure, then this kind of strategy often has outperformed bonds over the long-run.
It can be a useful strategy for someone who wants to see what returns might be made in a relatively short period of time, such as 1-3 years. It buffers against downside loss while offering opportunity for growth beyond the inflation rate.
These strategies are NOT guaranteed to achieve their goals, but they have generally been able to accomplish what they set out to do.
These types of returns will not likely keep up with an all-stock portfolio that is subject to full downside risk, so these are not generally good for long-term strategies.
But they can have their place for particular short- to medium-term goals.
And if it keeps an investor from trying to time the markets, that in itself is enough to make these strategies valuable.
HERE’S HOW I CAN HELP
COURSE 1 OF 3 IS AVAILABLE!
I am in the process of creating three in-depth digital courses that comprehensively will make you a master of your financial destiny.
The first course, called Low Risk Investing, is available and ready for enrollment. This lays a solid foundation for risk management and everything else investing.
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These are pre-recorded courses that you can follow at your own pace.
What you'll get with over 3.5 hours of content:
Learn to identify the main risks of investing.
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Access a risk tolerance questionnaire, a quick guide to low risk investments, a list of scenarios paired with low risk portfolios, and a list of companies where you can access such strategies.
I’d love to hear from you. Let me know what you’d like to see in upcoming newsletters, articles, or a digital course at Contact Us - The Wealth Expedition.