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VOL. 128 | NO. 86 | Thursday, May 02, 2013

Dana and Ray Brandon

Consider Norwegian Approach

By Ray and Dana Brandon

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Ray’s Take Modern Portfolio Theory argues it’s essential to determine the right mix of investments for your portfolio so your level of risk tolerance is balanced with opportunities gained. A portfolio of 60 percent stocks and 40 percent bonds has long been considered a standard.

Whether this is balance is right for you depends on your age, additional assets and other financial factors – your financial adviser can better advise you. However, it is not a bad starting point for many retired investors.

Once you’ve made that determination, the challenge becomes maintaining your desired portfolio balance. That’s where many people could learn from Norway. Norway’s enormous Government Pension Fund Global invests 60 percent in stocks, 35 percent in bonds, and 5 percent in real estate. That’s it. They’re also highly diversified, with shares in almost 9,000 different companies. They maintain this mix in a steadfast way.

Right now they’re getting attention for their approach’s success in a difficult market. Good for them. However, if you follow their basic investment plan it could be good for you, too.

When the value of stocks in their portfolio goes up, making them higher than 60 percent, stocks are sold to bring that proportion back down. When stock prices go down so they total less than 60 percent, the Norwegians are buying to raise that level.

Thanks to this ironclad discipline, Norway only buys when stock prices are relatively low and only sells when they are relatively high, utilizing the same method with bonds. By adhering to their 60/35/5 balance, they keep the damaging emotions of greed and fear from undermining their investment strategies.

There’s one important difference between a retiree and Norway. Pension plans have an indefinite life with new workers added while older ones pass on. Retirees get older each year. You might refine this approach with investments like international stocks, developing markets, and multiple bond sectors, etc.; and include life expectancy assumptions but the discipline is still the same.

Norway’s cool, unemotional approach to investing could be a good one to consider.

Dana’s Take Norway’s method of investing sounds pretty straightforward, but taking that unemotional approach can be a lot harder than it sounds.

When stocks are on the rise, it’s hard to go ahead and sell some. After all, if you wait a day or a week or a month, they could go higher still. It’s natural to hope a positive trend will keep flowing your way, even if it’s not the best investment strategy.

What’s more, you could get too caught up in the day-to-day ups and downs of the market. Buying and selling frequently is a path filled with danger for the average investor. If you can truly keep your cool, and only rebalance your portfolio at regular and infrequent times, good for you. Otherwise, look to a professional financial adviser for help.

Ray Brandon is a certified financial planner and CEO of Brandon Financial Planning (www.brandonplanning.com). His wife, Dana, has a bachelor’s degree in finance and is a licensed clinical social worker. Contact Ray Brandon at raybrandon@brandonplanning.com.

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