THE WEEK ON WALL STREET
Stocks were mixed during the first trading week of December. Technology stocks led, while the widely followed Dow Jones Industrial Average struggled. The tech-heavy Nasdaq Composite Index picked up 3.34 percent while the Dow Industrials lost 0.60 percent. The S&P 500 Index added 0.96 percent. The MSCI EAFE Index, which tracks developed overseas stock markets, gained 1.46 percent.
FACT OF THE WEEK
On December 10, 1690, a failed attack on Quebec and subsequent near-mutiny forced the Massachusetts Bay Colony to issue the first paper currency in the history of the Western Hemisphere.
With a shortage of coins and nothing else to pay the troops with, Governor William Phips of Britain's Massachusetts Bay Colony faced a potential mutiny. With no other option, on December 10th, 1690, the General Court of Massachusetts ordered the printing of a limited amount of government-backed, paper currency to pay the soldiers. A few months later, with tax season approaching, a law was passed removing the limit on how much currency could be printed, calling for the immediate printing of more, and permitting the use of paper currency for the payment of taxes.
The currency was initially unpopular for anything except paying taxes and was phased out. Within a few years, however, paper currency would return to Massachusetts. The Bank of England began issuing banknotes in 1695, also to pay for war against the French, and they became increasingly common throughout the 18th Century. Paper money continued to stoke controversy throughout the early history of the United States, and it was tied to the value of gold for a surprisingly long time. It was not until 1973 that President Richard Nixon officially ended the international convertibility of the U.S. dollar into gold.
MARKET MINUTE
Tech Takes Charge
The S&P and Nasdaq rallied to start the week, closing at record highs Monday and Tuesday. The Dow fell on both days. During a conference speech, Fed governor Christopher Waller said he supports a rate adjustment in December for now, which seemed to add momentum to the S&P’s and Nasdaq’s gains. Tech shares continued to propel stock gains midweek on the strength of a few better-than-expected Q3 reports.
On Friday, the S&P and Nasdaq hit new record highs following the November jobs report. Both notched their third consecutive winning week. By contrast, the Dow was down four of the five trading days, ending the week in the red after two back-to-back weekly gains.
Jobs Rebound
After two hurricanes and an aircraft maker strike weighed on the labor market in October, the November jobs report released Friday gave investors what they were looking for: confirmation that the October update was an anomaly. While November payrolls topped expectations, investors believed the hotter-than-expected report would not influence the Fed’s upcoming decision regarding short-term interest rates. The Fed’s scheduled two-day meeting ends on December 18.
FINANCIAL STRATEGY OF THE WEEK
Rebalancing Your Portfolio
Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach? It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent – and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio has its risk profile shift over time.
Balancing
When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance – that allocation – would remain steady for a period of time. But if the investments have varying returns over time, the portfolio may bear little resemblance to its original allocation.
How Rebalancing Works
Rebalancing is the process of restoring a portfolio to its original risk profile. There are two ways to rebalance a portfolio.
The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Asset allocation and diversification are investment principles designed to manage risk. However, they do not guarantee against a loss.
The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.
Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.
Shifting Allocation
Over time, market conditions can change the risk profile of an investment portfolio. For example, consider a hypothetical portfolio that was 50% invested in bonds, 10% in treasuries, and 40% in equity. Over the course of a few years, if the stock portion of the portfolio outperformed the other assets, the hypothetical portfolio may no longer reflect the initial allocation. An adjustment may be needed to reflect the original risk profile. Keep in mind that investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.