Here’s how old school investing can just protect your retirement

It seems that less people want to talk about investment portfolio management today. In fact, for many, “investing” means determining which mutual funds you should choose.

But mutual funds are not monolithic entities. They consist of investment portfolios of individual securities. So it makes sense that you understand how these wallets work.

Perhaps the most effective way to do this is to get back to basics. You might remember the phrase “old school hockey” (you know, like Eddie Shore). Well, there is such a thing as “old fashioned investing” (like Ben Graham).

Ben Graham, nicknamed the Father of Value Investing, is co-author of the founding book Securities analysis with David Dodd in 1934. This book is considered a “must read” if you dream of becoming a stock analyst and managing portfolios of all kinds (including mutual fund portfolios).

Of course you will probably find Graham’s The smart investor more accessible. This book was first published in 1949, but revised several times, the last being published in 1973, three years before Graham’s death. It is here, in Chapter 4, that Graham writes, “We have suggested as a basic rule of thumb that an investor should never have less than 25% or more than 75% of his funds in common stock, with the reverse range being the same. results between 75% and 25%. % in bonds.

This simple rule of asset allocation echoes the standard understanding of the benefits of diversification.

“Putting money into stocks, bonds and other asset classes is called diversification,” says Stuart Robertson, CEO of ShareBuilder 401k in Seattle. “Diversification between asset classes can be helpful, as one asset class may perform well while another suffers in different economic environments. Stocks have had years where returns have risen by over 20% and periods when they have fallen by 20% or more. They are big swings. Think about 2020. The stock market fell more than 33% in March, only to rebound quickly and post strong returns in December. It was a wild roller coaster. In March 2020 you might have felt like you lost a lot of money and then a year later you might be pretty happy. Just be aware that stocks are likely to go up and down at a much higher percentage than bonds and cash. “

That Graham suggests that you hold a significant portion of your portfolio in bonds or similar instruments therefore means one thing and only one.

“’Stable value investments’ deliver just that: stability,” says Ian Grove of RG Advisors Inc in Napa, Calif. “Maintaining a balanced portfolio would mostly include debt or fixed income securities to protect the investor’s portfolio against unexpected market events. ”

This dampening of volatility is especially important as you approach and extend your retirement years. You don’t have the luxury of making up for a sudden downturn.

“For those with short-term horizons, such as those reaching retirement age, having more conservative options, such as stable funds, can offer protection against volatility while providing some advantages over funds. money market, ”explains Syed Nishat, partner at Wall Street. Alliance Group in New York. “These funds can act as a stabilizer within a portfolio, protecting against market volatility with minimal risk. While the return is not as high as a higher risk fund, they have higher interest rates with little price movement.

There is a little more nuance to this than just minimizing the downside risk.

Steve Pilloff, based in Washington, DC, professor of finance in the School of Business at George Mason University, explains, “Fixed income and stable value investments are an important component of a diversified portfolio. People often believe that the benefit of diversification is that it reduces risk, but that’s only part of the picture. The real benefit of diversification is that it allows investors to maximize the risk-return tradeoff. A portfolio with only stocks and a certain level of risk will have a lower expected return than a diversified portfolio with the same level of risk.

Yet there is another advantage to dividing your portfolio into asset classes with complementary risk profiles.

“Graham was trying to argue that an investor’s biggest problem, or enemy, was psychology and himself,” says Paul Swanson, vice president, Retirement at Cuna Mutual Group in Madison, Wisconsin. “By keeping a portion of the stock market, they can protect themselves and their portfolios from themselves.”

In this way, Graham anticipated what would ultimately become “behavioral finance,” which is somewhat of a cross between finance and psychology. He was attempting to help non-professional (and perhaps even professional) investors conquer their inner demons by forcing portfolios to keep a bare minimum of 25% in bonds. (He actually simplified it by saying it’s easier to just have 50% stocks and 50% bonds.)

“Fixed income and stable value investments have generally played a key role in a diversified portfolio,” said Gaurav Sharma, CEO of Capitalize in New York. “There is a common sense reason for this. While the returns on these assets may not be as high as those on stocks over time, they are less “volatile” and less likely to fall in bear markets. Investing legends like Graham understood that successful investing is more about human psychology than anything else. Having a portion of our portfolio at low volatility helps cushion our losses and stay psychologically fortified when markets fall, as they inevitably do from time to time. This means that we are more likely to stay the course than to capitulate and sell our riskier investments when they decline. This is often the wrong time to sell.

If you’ve heard of the concept of rebalancing, you already know the real benefit of Graham’s advice. Brian Haney, founder and vice president of The Haney Company in Silver Spring, Maryland, says Graham’s flexible allocation guideline allows you “to have capital available to be opportunistic if the market presents such an opportunity.”

In The smart investorGraham explains it this way: “According to tradition and good reasoning for increasing the percentage of common stock, there would be the onset of the ‘bargain price’ levels created in a prolonged bear market. Conversely, good practice would require reducing the common equity component below 50% when, in the investor’s opinion, the market level has become dangerously high.

Now it is important to understand the following: Graham wrote this book almost 75 years ago. He understood that things are changing. Even his reviews update his advice. The basic meaning of what he said was well founded, but he was careful to suggest that you should be careful and not blindly follow anyone’s advice. (You might be wondering what his reaction might be to “robo-advice”.)

Old-fashioned investing continues to have a solid foundation.

“Graham was probably referring to hedging against stocks in the event of a market downturn,” says Todd Scorzafava, principal / partner and general manager of wealth management at Eagle Rock Wealth Management in East Hanover, New Jersey, “but still a times, depending on goals, timelines, comfort and current plans, this will vary from person to person. The risk in a portfolio must be fair for the investor to stay the course.

It is therefore important that you take any “old” advice as a starting point, and not as a definitive axiom.

“While the logic behind diversification remains strong, there is one thing to keep in mind about fixed income investing today compared to decades past: Interest rates on the whole have gone downhill. significantly decreased, so the yields offered by fixed income securities declined in nominal terms, ”says Sharma. “We may be about to collectively rethink the level of return we can count on for fixed income securities, but the larger point of not being exclusively in stocks or risky assets is still very important to keep. in mind.”

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