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It seems fewer people want to talk about managing investment portfolios today. In fact, for many, “investing” means determining which mutual funds you should pick. 
But mutual funds aren’t monolithic entities. They consist of investment portfolios of individual securities. It therefore makes sense for you to understand how these portfolios work. 
 
Perhaps the most effective way to achieve this is by going back to the basics. You might remember the phrase “old time hockey,” (you know, like Eddie Shore). Well, there’s such a thing as “old school investing,” (like Ben Graham). 
Ben Graham, called the Father of Value Investing, co-authored the seminal book Securities Analysis with David Dodd in 1934. This book is considered a “must read” if you dream of becoming a stock analyst and manage portfolios of all kinds (including mutual fund portfolios). 
 
Of course, you’d probably find Graham’s The Intelligent Investor more approachable. This book was first published in 1949, but revised several times, the last being published in 1973, three years before Graham’s death. It’s here in Chapter 4 that Graham writes “We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with the consequent inverse range of between 75% and 25% in bonds.” 
 
This simple asset allocation rule echoes the standard understanding of the benefits of diversification. 
“Putting money in stocks, bonds, and other asset classes is called diversification,” says Stuart Robertson, CEO of ShareBuilder 401k in Seattle. “Diversifying across asset classes can offer assistance as one asset class may perform well while another suffers in differing economic environments. Stocks have had years when returns increased greater than 20%, and periods where they have declined 20% or more. Those are big swings. Think about 2020. The stock market tumbled over 33% by March, only to quickly rebound and have strong returns by December. That was a wild roller coaster. In March of 2020, you might have felt like you lost a lot of money, and then a year later, you might be pretty happy. Just know that stocks are likely to go up and down at a much greater percentage than bonds and cash.” 
 
That Graham suggests you have a significant portion of your portfolio in bonds or similar instruments therefore means one thing and one thing only. 
“‘Stable value investments’ provide just that: Stability,” says Ian Grove of RG Advisors Inc in Napa, California. “Keeping a balanced portfolio would most of the time include debt or fixed income securities to shield the investor’s portfolio from unexpected market events.”  
 
This dampening of volatility is especially important as you approach and extend into your retirement years. You don’t have the luxury of time to make up from a sudden downturn. 
“For those with short time horizons, such as individuals reaching retirement age, having some more conservative options, such as stable funds, can offer protection from volatility while still providing some benefits over money market funds,” says Syed Nishat, Partner at Wall Street Alliance Group in New York City. “These funds can serve as a stabilizer within a portfolio, hedging against market volatility with minimal risk. While the yield isn’t as great as a higher risk fund, they do have higher rates of interest with little price fluctuation.” 
There’s a bit more of a nuance to this than simply minimizing downside risk. 
Washington, D.C based Steve Pilloff, professor of finance at George Mason University’s School of Business, explains, “Fixed income and stable value investments are an important component for a diversified portfolio. People often believe that the benefit of diversification is that it reduces risk, but this is only part of the picture. The true benefit of diversification is that it enables investors to maximize the risk-return trade-off. A portfolio with only stocks and a certain level of risk will have a lower expected return than a diversified portfolio with that same amount of risk.” 
Still, there’s another advantage to splitting your portfolio into asset classes with complimentary risk profiles. 
“Graham was trying to make the point that an investor’s biggest problem, or enemy, was psychology and themselves,” says Paul Swanson, Vice President, Retirement at Cuna Mutual Group in Madison, Wisconsin. “By keeping a portion out of the stock market, they may protect themselves, and their portfolios, from themselves.” 
In this way, Graham anticipated what would eventually become known as “behavioral finance,” which is sort of a cross between finance and psychology. He was attempting to help non-professional (and maybe even professional) investors conquer their inner demons by forcing portfolios to keep a strict minimum of 25% in bonds. (He actually made it simpler by saying it’s easier to just have 50% in stocks and 50% in bonds.) 
“Fixed income and stable value investments have typically played a key part in a diversified portfolio,” says Gaurav Sharma, CEO of Capitalize in New York City. “There’s a common sense reason for this. While the returns from these assets aren’t as high as equities over time, they are less ‘volatile’ and less likely to decline in bear markets. Investing legends like Graham appreciated that investing successfully is more about human psychology than anything else. Having a part of our portfolio that’s lower volatility helps cushion our losses and keep us psychologically fortified when markets fall, as they inevitably do from time to time. That means we’re more likely to stay the course than capitulate and sell our riskier investments when they decline. This is often the exact wrong time to sell.” 
If you’ve heard of the concept of rebalancing, then you already know the real advantage of Graham’s advice. Brian Haney, Founder &amp; 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 should the market present such an opportunity.” 
In The Intelligent Investor, Graham explains it thusly: “According to tradition and sound reasoning for increasing the percentage of common stocks would be the appearance of the ‘bargain price’ levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.” 
Now, it’s important to understand the following: Graham originally wrote this book nearly 75 years ago. He understood things change. Even his revisions update his advice. The basic sense of what he said was well grounded, but he was careful to suggest you need to pay attention and not follow anyone’s advice blindly. (You might wonder what his reaction might be to “robo-advice.”) 
Old school investing continues to build on a strong foundation. 
“Graham was likely referencing a hedge against equities in the event of a market downturn,” says Todd Scorzafava, Principal/Partner and Managing Director of Wealth Management at Eagle Rock Wealth Management in East Hanover, New Jersey, “but again, depending on goals, timeframes, comfortability and ongoing plans this will vary from person to person. The risk in a portfolio needs to be right in order for the investor to stay the course.” 
It is therefore important that you take any “old” advice as a starting point, not as a definitive axiom. 
“While the logic underlying diversification remains sound, there’s one thing to keep in mind about fixed income investments today versus decades past: interest rates across the board have compressed significantly, so the returns offered by fixed income have come down in nominal terms,” says Sharma. “We may be on the verge of a collective rethink on what level of returns we can count on from fixed income, but the broader point about not being exclusively in stocks or risky assets is still a very important one to keep in mind.” 
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Ben Graham stated that portfolio managers should try to keep at least 25% of the portfolio in fixed income or stable value investments. Why do you think he said this?

Here’s How Old School Investing May Just Protect Your Retirement