"The Intelligent Investor" by Benjamin Graham: 4 - General Portfolio Policy
General Portfolio Policy
In this Chapter Graham spends time looking at risk tolerance and the simplicity of creating and maintaining an investment portfolio. To create the ultimate portfolio that works for you, you are faced with two choices:
- Active Management: Continuous research and decision making to perfect your portfolio
- Passive Management: Autopilot like investment where no efforts are needed
The first approach will require your attention at all times, while the second requires you to be mentally strong and stable. To decide which approach is right for you, a mix of the two can also be considered.
Once you know which path to chose, you can decide on the percentages of cash, bonds, stocks, precious metals, crypto, … investments you are planning to hold. This mix all depends on you and your life circumstances. If you are young but are looking to purchase a house with a hefty downpayment, it is advisable to stay away from stocks and cryptos. On the other hand, if you have enough savings, you have family funds, a house and liquid assets, you can dedicate more towards riskier investments. Graham advises everyone to hold at least 25% and at most 75% of their money in bonds (something that is not prone to inflation and is stable) at all times. This will give you the confidence to hold your risky investments even if they plummet. Rebalancing your portfolio is also necessary, and the recommended frequency is twice a year.
A position of 50-50 is bonds and stocks is the ideal ratio Graham recommends. As a conservative investor, you should be happy with the moderate gains your portfolio generates.
If you are considering putting 100% of your money in stocks/risky investment, graham requires you to meet the following requirement:
- You have enough cash to support yourself and family for one year
- Are investing for the next 20 years
- Survived the bear market, and did not sell a single stock during it
- Bought more during the bear market
I believe this chapter teaches us that portfolios are highly personal and require a lot of thought and effort at time of creation. You must choose the strategy you want to implement and stick to it.
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