Deciding what to own in a portfolio is always a complicated process. Luckily, there are thousands of investment advisors out there who can help you pick and choose the right stocks. There are also tens of thousands of articles online that offer advice on the topic.
Trying to distinguish which of these articles and advisors offer the best proposition is difficult, but we don't need to spend too much time trying to figure it out.
Benjamin Graham's investment advice
In 1955, Benjamin Graham issued some advice on asset allocation for investors in different income brackets.
This advice is still as relevant today as it was when the dean of value investing first discussed it as part of an interview with U.S. News & World Report.
The one significant difference between 1955 and today is the income levels Graham referenced.
In the original article, he talked about the "$5,000 man," or a worker with an income of $5,000 a year, as well as the $10,000, $20,000, $30,000, $50,000 and $100,000 income brackets. These would be roughly $45,000, $90,000, $180,000, $225,000, $450,000 and $900,000 in today's money.
Apart from this change, the rest of the advice appears relatively sensible, even today.
For a start, Graham recommended that savers with an annual income of $5,000 (or $45,000) a year who want to invest in the market should:
"Do so reasonably well by following one of these accumulation programs in the investment fund area."
In other words, he recommended that investors with an income of $45,000 a year should buy mutual funds or passive tracker funds and avoid stocks and shares. Although he did later go on to say:
"[T]he $5,000 a year man should not be considered as having a fixed income as most people are expecting to earn more than that as they progress in their careers. It would not hurt the $5,000 a year man to start out in some common stock program, and get an education in common stocks, in part by practice."
Limited equity exposure
For the other income brackets, Graham recommended a higher allocation toward equities, but he also made it clear that in most cases, it might not be worth the extra work required.
For example, for those earning $90,000 to $180,000, Graham believed:
"On the whole, they can go higher in the common-stock spectrum than the persons who don't have earnings independent of capital. They could get into the two-thirds common stocks area very soundly."
However, when the interviewer asked him if investors in the $225,000 to $900,000 bracket would do well to have a higher than the two-thirds allocation to equities, he replied:
"I don't believe so, because, when you get beyond that range, you get to a different question where it's not so essential to try to get the maximum results out of your investments, but it becomes important to feel that you are protected against any eventuality. One of the advantages to having a lot of money is that nothing can hurt you."
He later went on to stress the importance of being able to make your own financial decisions in these higher income brackets:
"...the $450,000 man would feel that he would like to look over the situation in investments at least and consider making decisions of his own in the kind of securities that he wants. The amount of money that he has would make it worthwhile to give it thought and considerable care. I'm not so sure that this man would necessarily do any better than he would do if he bought mutual fund shares, but it's more natural and more interesting for him to do other things."
The dean of investing
Graham is commonly remembered as being nothing more than an investor and inventor of value investing. However, his advice on the topic of asset and wealth management was just as valuable as his teaching on common stock selection.
He wanted to help investors keep more of their cash, while at the same time earning higher returns on their investments.
The advice above does not constitute an investment strategy, but even though it is more than six decades old, the information is just as relevant today as it was when it was published in 1955.
Read more here:
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- Berkshire Hathaway: Considering the Stock's Underperformance in 2019
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