Ben Graham, the famous investor known for mentoring Warren Buffett and advocating for value investing, had a couple of brief rules for allocating your portfolio funds.
He has a simple rule depending on if you are an enterprising or a defensive investor.
How do you determine if you’re an enterprising or a defensive investor?
It’s not down to your age, but instead how much time you’re willing to put into managing your portfolio.
Enterprising vs. Defensive Investing
If you can’t really be bothered to take the time to properly value companies and invest in them, you’re a defensive investor.
You want to see your investments grow modestly without much effort.
If you get a lot of enjoyment from valuing companies and you want to spend the time to make these decisions in your portfolio then you’re classified as an enterprising investor.
Portfolio Allocations
Ben Graham advises that the enterprising investor limit his portfolio allocation to 75% in equities and 25% in bonds.
He advises that you never hold less than 25% of either bonds or equities.
You can rebalance your portfolio to be more or less conservative.
Graham’s argument for holding 25% of your portfolios in bonds is that it would give you the confidence to stay in the market whenever there is a market downturn.
An important note is that when Graham was writing his various editions of The Intelligent Investor US Treasury bonds were returning much more than they are today.
In 1963 the average US Treasury bond yield was 4%.
In 1980 the average yield was 11.43%.
In 2021 the average yield of a US Treasury bond is 1.42%.
That’s not even a large enough yield to keep up with inflation rates.
That’s why today Buffett suggests that the defensive investor keep 90% of their funds in a low-cost S&P 500 index fund and 10% in a low-cost bond fund.
The Truth About Portfolio Diversity
Portfolio diversity is an admission that you can’t select winning companies to invest in, which is okay.
Not everyone wants to dedicate the time and effort to learn how to evaluate companies and then consistently monitor them for investment opportunities.
But look at Buffett’s advice. Even when you buy the entire market through an index fund, he claims it’s best to place 90% of your portfolio in that one fund.
Sometimes diversifying can detract from our overall returns, especially if we diversify into high-cost equity funds.
What matters in the end is that you include a portion of your budget to be put towards investing.
If you do that, you’re already ahead of 45% of Americans.
How is your portfolio allocated? Would you consider yourself a defensive or enterprising investor?
Author Bio
Drake is a freelance writer who’s interested in history, economics, art, & beer. Drake graduated with a degree in Supply Chain Management and began working at General Motors. He writes about popular personal finance topics and shares his journey. Make sure to check back for more posts on Abnormal Money.
What do you mean by low cost funds?