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The RFG Weekly Wealth Report

February 10, 2020
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The Week on Wall Street

Stocks advanced four days out of five during the past market week, erasing the losses of the week before.

 FACT OF THE WEEK

On this day, in 1863, the first fire extinguisher was patented in the United States, by Alanson Crane. Fire safety was somewhat of a contradiction in terms of centuries past, when everything from cooking to heating to lighting relied on open flames, and building codes were considerably looser.

Fire suppression systems became considerably more advanced by the late 1700s. More than just water, they utilized chemical reactions to smother the fires, first only with plain saltwater and then with carbon tetrachloride for electrical fires. Crane's tube-container was a step up from the fire suppression glass "grenades" that were previously the most popular form of emergency firefighting.

MARKET MINUTE

The Nasdaq Composite surged 4.04%, the S&P 500 3.17%, and the Dow Jones Industrial Average 3.00%. Foreign stocks also rallied: the MSCI EAFE index added 2.21%. ,

China Plans to Halve Some Tariffs

Thursday, investors woke up to the news that China would be lowering import taxes on about $75 billion of U.S. products. Later this week, a set of 10% tariffs is slated to drop to 5%, and a group of 5% tariffs is scheduled to fall to 2.5%.

This reduction is part of the phase-one trade deal that China agreed to last month, a pact which may be a step toward a trade truce with the U.S.

January’s Net Job Gain: 225,000

The Department of Labor’s latest employment report exceeded expectations. Economists surveyed by Bloomberg projected 165,000 net new hires last month. The main jobless rate ticked north to 3.6%; the U-6 rate including the underemployed rose 0.2% to 6.9%.

This upside surprise points to ongoing strength in the economy. Stocks declined Friday after the report’s release, however, as traders viewing the data saw less reason for a Federal Reserve rate cut in the near future.

A Manufacturing Positive

The U.S. factory sector grew last month, for the first time since July. The Institute for Supply Management’s purchasing managers index for the manufacturing sector, which traders view as a fundamental economic indicator, came in at 50.9 in January; any reading above 50 indicates sector expansion.

What’s Ahead

Investors should note that U.S. stock and bond markets will be closed on Monday, February 17 for Presidents Day.

FINANCIAL STRATEGY OF THE WEEK

Rebalancing Schedule: When to rebalance your portfolio?

There is no set rule to indicate when the best time is for portfolio rebalancing. Some investors choose to rebalance when their portfolio’s allocation is off by a specific percentage — say 5%. Others may be comfortable setting the target higher or lower.

If an investment is successful, most people naturally want to stick with it. But is that the best approach? 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.

When considering how to allocate your investments, many begin by taking into account their time horizon, risk tolerance, and specific goals. Individual investments are next in the pursuit of the overall objective. If all the investments selected had the same return, that balance — that allocation — would remain steady for some 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. Diversification is an investment principle designed to manage risk. However, diversification does 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 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.

As always, please contact my office with any questions or financial concerns you may have.

Have a great week!