The Intelligent Investor_ The Definitive Book on Value Investing - Benjamin Graham [51]
It may be objected that dollar-cost averaging, while sound in principle, is rather unrealistic in practice, because few people are so situated that they can have available for common-stock investment the same amount of money each year for, say, 20 years. It seems to me that this apparent objection has lost much of its force in recent years. Common stocks are becoming generally accepted as a necessary component of a sound savings-investment program. Thus, systematic and uniform purchases of common stocks may present no more psychological and financial difficulties than similar continuous payments for United States savings bonds and for life insurance—to which they should be complementary. The monthly amount may be small, but the results after 20 or more years can be impressive and important to the saver.
The Investor’s Personal Situation
At the beginning of this chapter we referred briefly to the position of the individual portfolio owner. Let us return to this matter, in the light of our subsequent discussion of general policy. To what extent should the type of securities selected by the investor vary with his circumstances? As concrete examples representing widely different conditions, we shall take: (1) a widow left $200,000 with which to support herself and her children; (2) a successful doctor in mid-career, with savings of $100,000 and yearly accretions of $10,000; and (3) a young man earning $200 per week and saving $1,000 a year.*
For the widow, the problem of living on her income is a very difficult one. On the other hand the need for conservatism in her investments is paramount. A division of her fund about equally between United States bonds and first-grade common stocks is a compromise between these objectives and corresponds to our general prescription for the defensive investor. (The stock component may be placed as high as 75% if the investor is psychologically prepared for this decision, and if she can be almost certain she is not buying at too high a level. Assuredly this is not the case in early 1972.)
We do not preclude the possibility that the widow may qualify as an enterprising investor, in which case her objectives and methods will be quite different. The one thing the widow must not do is to take speculative chances in order to “make some extra income.” By this we mean trying for profits or high income without the necessary equipment to warrant full confidence in overall success. It would be far better for her to draw $2,000 per year out of her principal, in order to make both ends meet, than to risk half of it in poorly grounded, and therefore speculative, ventures.
The prosperous doctor has none of the widow’s pressures and compulsions, yet we believe that his choices are pretty much the same. Is he willing to take a serious interest in the business of investment? If he lacks the impulse or the flair, he will do best to accept the easy role of the defensive investor. The division of his portfolio should then be no different from that of the “typical” widow, and there would be the same area of personal choice in fixing the size of the stock component. The annual savings should be invested in about the same proportions as the total fund.
The average doctor may be more likely than the average widow to elect to become an enterprising investor, and he is perhaps more likely to succeed in the undertaking. He has one important handicap, however