(Guest post by Joseph Hogue, CFA): The idea of stress-free investing for the individual investor is one of the best themes in The Intelligent Investor. Unfortunately, sometimes it’s a little vague on how you can apply the concepts and create your own portfolio. For that, I use one of my favorite investing tools to create a simple portfolio and save money investing.
Here you’ll find articles on traditional and not-so-traditional approaches to investing — primarily in individual stocks, exchange-traded funds, mutual funds, and bonds. Along with my breakdown and scrutiny of general strategies are first-hand experiences in implementing these approaches. Specific topics include building an investment portfolio and possible ways to determine whether a stock is bargain priced. Information and insights in the Investing category can help you develop a framework for making investment decisions.
I’ve been reading Misbehaving: The Making of Behavioral Economics by Richard H. Thaler. A point of interest is the discussion of automatic enrollment in 401k plans. Automatic enrollment may get employees started saving for retirement. But 401k default options associated with this type of sign-up (such as an investment choice of a money market fund and a savings rate of 3%) may be unlikely to help employees achieve the outcomes needed for a comfortable retirement.
According to Thaler, “Both of these default choices — the money market investment option and the 3% savings rate — were not intended by the employer to be either suggestions or advice. Instead, these options were picked to minimize the chance that the company would be sued.”
So, what’s the story about these default options?
Chapter 8 of The Intelligent Investor focuses on dealing with market fluctuations. Graham opens this chapter advising investors to know about the possibility of these ups and downs. He urges us to be prepared financially and psychologically.
To be clear about the nature of potential fluctuations, Graham describes a probable set of circumstances. Within the next five years, shares of a given security may experience a 50+% price increase from its low point or a 30+% decline from its high point. Such changes in stock prices may bear no relationship to changes in economic values.
While the rise in prices sounds great, the decrease seems scary. Still, it’s this scenario for which Graham wishes to equip investors to withstand (and possibly profit from). He offers advice that I interpret in this way:
In “Chapter 4: General Portfolio Policy: The Defensive Investor” of The Intelligent Investor, Benjamin Graham introduces the concept of a portfolio policy, which is a general guide for making investment decisions.