The defensive investor should never have less than 25% or more than 75% in common stocks, with a consequent inverse range of between 75% and 25% in bonds. True False
The correct answer and explanation is:
Correct Answer: True
Explanation:
This statement is True and is derived directly from the investment philosophy of Benjamin Graham, the father of value investing, as explained in his classic book “The Intelligent Investor.” In his discussion of asset allocation for the defensive investor—someone who seeks to avoid substantial risk and prefers a more passive investment approach—Graham proposes a strategic guideline for balancing between stocks and bonds.
Graham’s Asset Allocation Strategy:
Benjamin Graham advised that the defensive investor should never have less than 25% or more than 75% of their investment portfolio in common stocks. Conversely, the allocation to bonds or high-grade fixed-income securities should also range between 25% and 75%, depending on market conditions. The purpose of this rule is to:
- Protect Against Market Volatility: By maintaining at least 25% in bonds, the investor cushions their portfolio against sharp downturns in the stock market.
- Benefit from Equity Growth: By keeping at least 25% in stocks, the investor maintains some exposure to the long-term growth potential of equities.
Adjusting Based on Market Conditions:
Graham encouraged investors to adjust their allocation within these ranges based on prevailing market conditions:
- When the stock market is high and overvalued, a defensive investor might reduce stock exposure closer to 25% and increase bond holdings to 75%.
- When the market is undervalued, they might raise stock exposure up to 75% and reduce bonds to 25%.
Psychological Benefit:
This approach also provides a psychological anchor—it helps investors avoid emotional decisions such as selling all stocks in a crash or going all-in during a boom. The flexible but disciplined strategy encourages buying low and selling high over time.
Conclusion:
Therefore, the guideline that the defensive investor should maintain between 25% and 75% in common stocks, and inversely in bonds, is True, and it remains a timeless principle of prudent investing.