Benjamin Graham — Warren Buffett's mentor — advised keeping at least 25% of one's portfolio in bonds, even in the most attractive markets.
Staying Invested
One of the fundamental principles of Value Investing is to stay invested — either in Equity or in Debt — at all times.
As Jack Bogle so succinctly put it in the very first of his Principles for Investing:
"Invest you must. The biggest risk is the long term risk of not putting your money to work."
Graham explained the principle in a little more detail, writing:
"But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trust-worthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income."
25% To 75%
Graham recommended maintaining a balance between equity and debt in one's portfolio; with a minimum of 25% for one and a converse maximum of 75% for the other, depending on market conditions.
"The investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums... "
This was in addition to his recommendations on diversification and position sizing. Graham also gave precise instructions on how to compare bond yields to stock prices.
Rationale
Graham's framework is as much about behavior, as it is about numbers. Accordingly, a lot of Graham's recommended investment processes are designed to keep the investor's more dangerous instincts in check.
The process of maintaining a balance between equity and debt in one's holdings has both psychological and practical benefits for the investor.
On the one hand, such a strategy keep the investor's energies focused on the right activities; and more importantly, away from the wrong ones. On the other, it ensures a sensible outcome for the investor no matter what the future outcome of the market.
Example
One of the times when the astuteness of Graham's advice becomes most evident, is when the market drops.
A portfolio with 25% kept in bonds during a bull market, will have significant liquidity available for purchasing equities at bargain prices during a bear market.
Buffett about Graham
Son named after Graham
"Absolutely" valid in 2018
In the 2018 Balance of Power interview for Bloomberg Markets, Warren Buffett says yet again:
"The principles [of investing] haven't changed at all... It's exactly what Ben Graham wrote in 1949."
Submitted by GrahamValue. Created on Monday 14th December 2015. Updated on Wednesday 1st May 2024.