Comment on Chapter 4

 How aggressive should your portfolio be?Graham says that it depends less on what kind of investments you have made. It matters more on what kind of investor you are. There are two ways to become an intelligent investor.By continually researching, selecting, and monitoring a dynamic mix of stocks, bonds, or mutual funds;Or by building a sustainable portfolio that's on auto-pilot and requires no effort (but provides mild excitement.)The first approach, which Graham calls 'active' and 'entrepreneurial', requires a lot of time and energy. The 'passive' and 'defensive' strategy requires less time or energy, but requires an almost ascetic-like detachment from the lucrative fluctuations of the market. As investment thinker Charles Ellis puts it, while the entrepreneurial approach is physically and intellectually taxing, the defensive approach is emotionally taxing.If you have time to spare, you tend to be highly competitive and think like a sports fan and don't like a complex intellectual challenge.
So maybe the Consolidated approach is right for you, but if you're always on the fence, want simplicity, and don't care about the details, the Dependent approach is for you. For some people, it's best to consider both approaches—building a portfolio that's primarily active and partially passive, or vice versa.)Both approaches are equally wise, and either can be successful, but only if you know yourself well enough to pick the right one and stick to it throughout your investment life, keeping your costs and emotions in check. Graham's distinction between active and passive investors is meant to reiterate to me that financial risk is not just out there, whether we look for it in the economy or our investments, but also within us.

Can you be brave or will you bow down?
So how should a defensive investor start? The first and most basic decision is how much to put in stocks and how much in bulls and dollars. (Note that Graham has carefully placed this point after the epiphany, so you know in advance that inflation is one of your greatest enemies.)What's most striking about his advice on how to allocate your assets between stocks and bonds is that he never uses the word "age." His advice runs completely counter to the prevailing wisdom that how much investment risk you're willing to take depends primarily on how old you are. A traditional rule of thumb is to subtract your age from 100 and invest the resultant percentage in stocks and the rest in bonds. (A 28 Year-old should invest 72% in stocks, an 81 Year-old in stocks.) As with everything else, this was the norm in the late 1990s. By 1999, a popular book argued that if you were under 30, you should invest 29% of your money in stocks, even if your risk appetite was average.
If you haven't allowed the proponents of this suggestion to add 100 to your IQ, you might say there's something wrong with this. How does your age determine how much risk you can take? An 89-year-old woman with $53 million, a substantial pension, and lots of grandchildren would be foolish to put most of her money in bonds. She already has a substantial income, and her grandchildren (who will inherit it) have decades of investing years ahead of them. On the other hand, a 25-year-old man who is saving for his wedding, buying a house, etc., makes no sense to put all his money in stocks. If the stock market takes a big drop, he will have no bond yield to cushion the loss or to remember.What's more, no matter how young you are, you may suddenly need to withdraw your money from stocks, not 40 years from now, but in minutes right now. Without warning, you could lose your job, get divorced, become disabled, or something unexpected could happen. Unexpected things can happen to anyone, at any age. Everyone should keep a little cash in a risk-free position.In the end, many people stop investing because the stock marketgoes down. Psychologists have shown that most of us are pretty bad at predicting how we will feel when something emotional happens in the future. When stocks are going up 15% to 20% per year, as they were in the 1980s and 1990s, it's easy to imagine holding those stocks for life, but when you see every inch of your wealth going down, the urge to move to the 'safety' of bonds or bonds is impossible to resist. Instead of buying stocks and holding them, many people buy them high and sell them low, thus leaving them with nothing but trouble, because few investors have the courage to hold on to their stocks in a falling market. Gradhan insists that everyone should put a minimum of 25% in bonds. They argue that this support will give you the courage to invest your remaining money in stocks even when they are doing poorly.To better understand how much risk you can afford, consider your basic life circumstances, when they occur, when they change, and 3 How these affect your cash requirement.

Are you married or single? What does your partner or spouse do?
Do you have children who are going to be children? When will their studies begin?

Will you inherit money, or are your aging and ailing parents dependent on you?

Could your career be affected by kill pines? (If you work in home construction at a bank, rising interest rates could cost you your job. If you work at a chemical manufacturer, rising oil prices could be bad news for you.)

If you're self-employed, how long can you survive the work you're doing?
Do you need investments to supplement your cash? (Which usually takes place in bonds; not stocks.)

Considering your budget and spending requirements, can you afford the financial loss in investing?
If, after taking these factors into account, you feel you can take the higher risk of higher shavers, you are in Graham's category that puts a minimum of 25% in bonds or cash. If not, stay as far away from shavers as possible and move to Ian's category that puts a maximum of 75% in bonds or cash. (See the side-bar to see if you can go as high as 100%.)Andne kGiveK SitOnce you've decided on these goal percentages, only change them when your life changes. Don't buy more stocks just because the stock market is going up or sell more because it's going down. The key to Pratham's method is to turn guesswork into discipline. Fortunately, through your 401(k), it's easy for you to automate your portfolio permanently. Let's say you're comfortable taking more risk - say, 70% in stocks and 30% in bonds. If the stock market goes up by 25% (but you hold bonds steady), you'll now have less than 15% invested in stocks and only 25% in bonds. In your 401(k), you'll have less than 15% invested in stocks and only 25% in bonds.
Visit their website (or call their toll-free number) and add enough of your shares to rebalance to your 70-30 target. The key is to rebalance on a predictable, patient plan that is not so frequent that you go crazy, and not so infrequent that you miss your target. I recommend rebalancing every six months, no more, no less, and on easily remembered dates like New Year's or the Fourth of July.
Why not 100% in shares?
Graham advises you to never invest more than 75% of your total wealth in stocks. Is it unfair for everyone to invest all their money in the stock market? A 100% stock portfolio is fine for the vast majority of investors. You can also invest in stocks if you are one of them.

If you have set aside enough money for your family to support them for at least one year.
If you can invest stably for at least the next 20 years.
Have remained in the bear market that started in 2000.
Do not sell shares in the bear market that started in 2000.
You may have purchased shares during the bear market that began in 2000.
You should have read Chapter 8 of this book and made a formal plan to control your investment behavior.
If you honestly don't meet this test, you should not put all your money in stocks. Anyone who panicked in the last bear market will surely panic in the next one and will regret not having the support of cash or bonds.
The beauty of this periodic rebalancing is that it forces you to base your investment decisions on simple, common criteria. Do I own more assets than my plan allows? You're not just acting on a guess about where interest rates are going or whether you think the Dow will fall too soon. Several mutual fund companies, including T. Rowe Price, will soon offer services that will allow you to rebalance your 401(k) portfolio automatically.
It will be rebalanced according to current goals, so you never have to make active decisions again.
Complete details of income Investing
in Graham's time, bond investors had two choices: taxable or tax-free? Short-term or long-term? Today, there is a third option: bonds or bond funds?Taxable or tax-exempt? Unless you are in the lowest tax bracket, you should only buy tax-exempt (municipal) bonds outside of your retirement account, otherwise much of your bond income will end up in the hands of the IRS (taxes). The only sane thing to buy taxable bonds is inside your 401(4) or other security account where you will not be taxed on the income and that is not where municipal bonds belong, as their tax-exempt benefit would be wasted.'Short-term or long-term? Bonds and interest rates: two parts of the equilibrium swingare: If interest rates rise, bond prices will fall although the fall in short-term bonds is less than that of long-term bonds. On the other hand, if interest rates fall, bond prices will rise and long-term bonds will perform better than short-term ones. You can simply divide the difference between them, By buying intermediate-term bonds that mature in five to 10 years - and whose yields may not rise if the wind blows in their favor, but may not fall either. Intermediate bonds are the easier option for most investors, as they eliminate the need to constantly guess at interest rates.Bonds or bond funds? Because bonds are typically sold in $10,000 lots and you only need a minimum of 10 bonds to break even, buying individual bonds doesn't make sense unless you have at least $100,000 to invest. (The only exception is bonds issued by the US Treasury, as they are automatically backed by the full power of the US government.)Bond funds provide inexpensive and easy diversification, with the convenience of monthly income that you can reinvest in the fund at current rates without paying commission. For most investors, bond funds are better than individual funds (the main exceptions are Treasury securities and some municipal bonds). Some of the major firms, such as Vanguard, Fidelity, Schwab, and T. Rowe Price, offer many bond funds at fairly low prices.The choices for bond investors are plentiful, so let's update Graham's list to reflect what's available. In 2003, interest rates were so low that investors were craving bonds, but it was possible to increase interest income without taking on too much risk." Figure 4-1 summarizes the pros and cons.cash not rejectedHow can you get more from your cash? The intelligent investor should consider getting out of bank certificates of deposit or money market accounts--which have had very low returns over time--and investing in these new options.
Treasury securities have almost no investment from the government; instead of increasing their income, they either increase taxes or make money from it.
The bars mature in 13 or 26 weeks. Because of their short maturity, T-bills rarely have any impact when prices of real investment income begin to fall due to rising interest rates. The longer the term, the more severe the impact of rising interest rates. The interest income on Treasury securities is generally exempt from state income taxes (but not federal taxes). And because the public owes $3.7 trillion, the market for Treasury debt is huge, so if you need your money back before maturity, you'll likely find a buyer. You can buy Treasury bills, short-term notes and long-term notes from the government at https://www.studyiq52.blog/2025/08/chapter-4-general-portfolio.html. with no broker fees. (See the note to Chapter 2 for more on inflation-protected notes.)
Savings bonds, like Treasuries, are not marketable. You cannot sell them to another investor, and if you redeem them before five years, you must forfeit three months of interest. Thus they are primarily suitable as "set aside money" that can be spent on future needs - a gift for a religious ceremony that will be years away, or your newborn's Harvard education. They also come in denominations as low as $25, making them excellent gifts for grandchildren. For directors who are confident they can put some cash aside for years to come, inflation-protected "I-bonds" recently offered attractive yields of about 4%. To learn more, visit https://www.studyiq52.blog/2025/08/chapter-4-general-portfolio.html.
ahead of uncle Sam
there are thousands of mortgage securities in the US. Their Pools these bonds are issued by agencies such as the Federal National Mortgage Association ('Fannie Mae') or the Government National Mortgage Association ('Ginnie Mae'). However, they are not backed by P/E Treasuries, so they are sold at a higher yield to reflect their greater risk. Mortgage bonds generally do not perform well when interest rates are falling, and tend to do well when they rise. (Over the long term, the higher the upside, the higher the average yield). Good mortgage bond funds Vanguard, Fidelity, and Pimco have options, but if a broker tries to sell you individual mortgage bonds or 'CMOs', be sure to tell them you need to see your doctor.Annuity, this instrument-like investment allows you to get a boosted income after retirement by deferring current taxes. Best Return Rate in Fixed Annuity Variable annuities have a volatile rate of return, but the defensive investor really has to guard against aggressive insurance agents, stockbrokers, and financial planners who sell annuities at extortionate prices. In most cases, the high costs of owning an annuity, including surrender charges that apply if they are redeemed early, outweigh the excitement about the benefits. Some good annuities are bought, not sold. If the seller of an annuity is earning a large commission, it is likely that the buyer has little benefit. Buy only those annuities you can buy directly from managers such as Ameritas, TIAA-CREF, and Vanguard."
Preferred stocks Preferred shares are the worst investment in every way. They are less safe than bonds, since they have only a second-rate claim on a company's assets if it goes bankrupt. And their profit potential is lower than that of ordinary shares, because companies can usually call (or force-buy) their preferred shares when interest rates fall or their credit rating improves. Unlike the interest payments on most bonds, the companies that issue them do not get a corporate tax break on preferred dividend payments. Ask yourself: if this company is healthy enough for me to invest in, why is it paying a hefty dividend on its preferred shares rather than issuing bonds and getting a tax break? The answer is that the company is not doing well, the market for its bonds is oversaturated, and buying its preferred shares is like buying a dead fish that has not been frozen.Ordinary Stocks, as of early 2003, 115 stocks in the Standard & Poor's 500 Index showed a dividend yield of 3.0% or higher, according to the Stock Screener at https://www.studyiq52.blog/2025/08/chapter-4-general-portfolio.html. No intelligent investor, no matter how hungry for yield, will buy a stock for the dividend income alone. The company and its business must be solid, and the stock price must be reasonable. However, because of the bear market that began in 2000, some major stocks are offering higher yields than Treasury bonds today. Therefore, even the most defensive investor should recognize that adding select stocks to a bond-only or mostly bond-only portfolio can increase its income yield and potentially boost returns.

Conclusion : 

1. For more on Bob's distinction between 'physically and intellectually difficult investing and investing that is emotionally difficult, see Chapter 4. See Varta D. Ellis' article "How Well to Succeed as an Investor" in Investing's Encyclopaedia (John Wiley & Sons, 1997), p. 22, written by Charles Ellis and James R. Vertis.
2. 'A recent Google search for the phrase "age and asset allocation" returned over 30,000 online references.
3. 'James K. Glassman and Kevin A. Hassett, Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market (Times Business, 1999), p. 250.
4. 'For a fascinating essay on this psychological phenomenon, see 'Miswanting' by Daniel Gilbert and Timothy.
5. 'For the sake of simplicity, this example assumes that the prices of these stocks increased suddenly.