If, after considering these factors, you feel you can take the higher risks inherent in greater ownership of stocks, you belong round Graham's minimum of 25% in bonds or cash. If not, then steer mostly clear of stocks, edging toward Graham's maximum of 75% in bonds or cash. (To find out whether you can go up to 100%, see the post titled as "Why Not 100% Stocks")
Once you set these target percentages, change them only as your life circumstances changes. Do not buy more stocks because the stock market has gone up; Do not sell them because it has gone down. The very heart of Graham's approach is to replace guesswork with discipline.
Let's say you are confortable with a fairly high level of risk-say, 70% of your assets in stock and 30% in bonds. If the stock market rises 25% (but bonds stay steady), you will now have just under 75% in stocks and only 25% in bonds. Do sell enough of your stock funds to "rebalance" back to your 70-30 target.
Do "rebalance" back to your percentage target very six months. The key is to rebanlance on a predictable, patient schedule-not so often that you will drive yourself crazy, and not so seldom that your targets will get out of whack. The beauty of this periodic rebalancing is that it forces you to base your investing decisions on a simple, objective standard-Do i now own more of this asset than my plan calls for?
- The Intelligent Investor, Benjamin Graham
