The defensive investor's portfolio
Graham's split between bonds and stocks, the 50–50 default, and rebalancing when the mix drifts.
FinanceGraham ch. 4About 4 min: 2 reading, 2 practiceUpdated
General education, not financial advice.
- State Graham's 25–75% range for stocks and his 50–50 default
- Rebalance a portfolio back to its target
- Explain why Graham ties the return you seek to effort, not risk
Builds toward: Invest on your own. Understand low-cost funds, read a fund factsheet, and spot a sales pitch.
The Intelligent Investor: Benjamin Graham's ideas: lesson 4 of 25
- Graham ch. 1
- Investment versus speculation 4 min
- Graham ch. 2
- Inflation and the investor 4 min
- Graham ch. 3
- A century of market history 5 min
- Graham ch. 4
- The defensive investor's portfolio 4 min
- Graham ch. 8
- Mr. Market 5 min
- Living with fluctuations 5 min
- Graham ch. 9
- Investing in funds 5 min
- Costs and the market
- Is advice worth paying for? 7 min
- Reading the accounts
- The balance sheet always balances 5 min
- Graham ch. 5
- Defensive investors and stocks 4 min
- Graham ch. 6
- What the enterprising investor avoids 4 min
- Graham ch. 11
- Security analysis for the lay investor 4 min
- Graham ch. 12
- Per-share earnings and their traps 4 min
- Graham ch. 7
- What the enterprising investor does 5 min
- Graham ch. 13
- Comparing four companies 4 min
- Graham ch. 14
- The defensive investor's screen 4 min
- Graham ch. 15
- The enterprising investor's screen 7 min
- Graham ch. 16
- Convertibles and warrants 6 min
- Graham ch. 17
- Four extreme case histories 7 min
- Graham ch. 18
- Eight pairs of companies 7 min
- Graham ch. 19
- Shareholders, managements and dividends 5 min
- Graham ch. 20
- Margin of safety (1): the idea 5 min
- Margin of safety (2): in practice 7 min
- Graham appendix 1
- The superinvestors of Graham-and-Doddsville 6 min
- Graham postscript
- Graham today 7 min
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Pairs with Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 4, "General Portfolio Policy: The Defensive Investor"
What it is
Graham's defensive investor divides money between high-grade bonds and high-grade stocks, and he gives a simple rule:
- never less than 25% or more than 75% in stocks (so bonds also stay between 25% and 75%);
- the simplest choice is 50–50;
- when market moves have disturbed the 50–50 split by "as much as, say, 5%" (his wording in chapter 1), restore it: at 55% stocks, sell some stocks and put the proceeds into bonds.
At 55% stocks, that means selling one-eleventh of the stocks: 55 × 1/11 = 5, leaving 50 in stocks and 45 + 5 = 50 in bonds.
Graham admits that adding stocks when prices are low and cutting them when prices are high is easy to say and hard to do, because it goes against human nature. The 50–50 rule is his answer: it aims in the right direction, and it restrains you from being drawn more heavily into stocks as the market rises. Zweig suggests a different trigger: rebalance on a fixed schedule, every six months.
Quick check
Tap an answer to check it.
A 50–50 portfolio drifts to 45% stocks after a fall. What does Graham's rule say?
- That's the opposite of rebalancing
Show answer
Move money from bonds into stocks to get back to 50–50. Rebalancing buys the side that fell.
Why it matters
Graham turns the usual idea around. Most people link return to risk. He links it to effort: the defensive investor accepts a modest return in exchange for safety and freedom from worry; a higher return should come from more intelligent work, not more risk.
Zweig adds that Graham never mentions age. Common rules of thumb set your stock share by your age, but Zweig argues your circumstances matter more: an elderly person with plenty of income may hold stocks for heirs, while a young person saving for a deposit on a home needs the money safe.
Worked example
A portfolio starts at 5,000 in stocks and 5,000 in bonds. A year later stocks are worth 6,000 and bonds 5,000.
- Total: 11,000. Stocks: 6,000 ÷ 11,000 ≈ 54.5%, just inside Graham's 5-point example, so no change yet.
- The next year stocks are 6,600 and bonds 5,000: 6,600 ÷ 11,600 ≈ 56.9%, now more than 5 points off.
- Target 50%: 11,600 × 0.5 = 5,800 in each. Move 800 from stocks to bonds.
Common mistake
Letting the winners run until they dominate. After a long rise, an unrebalanced 50–50 portfolio can become 70–30 or more: much riskier than intended, often after prices have risen a long way. Rebalancing sells a little of what rose and buys what fell.
Key terms
- asset allocation
- how money is split between stocks, bonds and cash
- rebalancing
- trading back to your target mix after prices have moved
- high-grade bond
- a bond from a very creditworthy borrower
- defensive investor
- Graham: wants safety and freedom from concern (a passive, low-effort approach)
Practise the key terms
Tap a card to turn it over. 4 cards.
| Front | Back |
|---|---|
| asset allocation | how money is split between stocks, bonds and cash |
| rebalancing | trading back to your target mix after prices have moved |
| high-grade bond | a bond from a very creditworthy borrower |
| defensive investor | Graham: wants safety and freedom from concern (a passive, low-effort approach) |
Practice
Work it through
Your target is 50% stocks. You hold 7,000 in stocks and 5,000 in bonds.
- 7,000 ÷ 12,000 × 100
- 12,000 × 0.5
- 7,000 − 6,000
Quick quiz
Tap an answer to check it.
Graham's range for the stock share of a defensive portfolio is…
- Graham sets limits on both sides
- He also wants at least 25% in bonds
Show answer
25% to 75%. Never less than 25% or more than 75% in stocks.
In Graham's view, what should decide the return you aim for?
- Graham explicitly rejects this
Show answer
How much intelligent effort you'll put in. Effort, not appetite for risk.
In short
- Stocks between 25% and 75%; the simplest default is 50–50.
- Graham: restore 50–50 when the mix drifts (his example: by about 5 points). Zweig: rebalance every six months.
- Rebalancing sells some of what rose and buys what fell.
- Graham ties return to effort, not risk; Zweig adds that circumstances matter more than age.
Mastery check
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Check yourself
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A 50–50 portfolio reaches 55% stocks. What fraction of the stocks does Graham sell?
Show answer
One-eleventh, which brings it back to 50–50.
Why does Graham like the 50–50 rule even though it's simple?
Show answer
It aims in the right direction and restrains you from being drawn more heavily into stocks as the market rises.
What does Zweig say about age-based rules?
Show answer
That Graham never mentions age, and your circumstances matter more than your age.
Further reading
- Benjamin Graham, The Intelligent Investor, revised edition with commentary by Jason Zweig (HarperBusiness, 2003), chapter 4.
- Investor.gov: Asset Allocation, the U.S. SEC's beginners' guide.
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