Constant Dollar Plan is a

portfolio Portfolio may refer to: Objects * Portfolio (briefcase), a type of briefcase Collections * Portfolio (finance), a collection of assets held by an institution or a private individual * Artist's portfolio, a sample of an artist's work or a ...

investment plan where a simple variable ratio is used for

rebalancing investments In finance and investing, rebalancing of investments (or constant mix) is a strategy of bringing a portfolio that has deviated away from one's target asset allocation back into line. This can be implemented by transferring assets, that is, selling i ...

. The constant ratio plan was one of the first plans devised when institutions started to invest in the

stock market A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...

in the 1940s. One type of plan is called a "variable ratio plan". There are several ways of executing these plans. The simplest variable ratio plan is called the Constant Dollar Plan where you take a simple ratio between

asset classes In finance, an asset class is a group of marketable financial assets that have similar financial characteristics and behave similarly in the marketplace. These instruments can be distinguished as either having to do with real assets or having ...

and rebalance it as the value of the stocks change based on a fixed currency amount.

Example

One possible scenario is an investor with $10,000 to invest. He invests half into

stock Stocks (also capital stock, or sometimes interchangeably, shares) consist of all the Share (finance), shares by which ownership of a corporation or company is divided. A single share of the stock means fractional ownership of the corporatio ...

s, and the other half into

bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Fidelity bond, a type of insurance policy for employers * Chemical bond, t ...

s or a

money market fund A money market fund (also called a money market mutual fund) is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a hig ...

. If his

shares In financial markets, a share (sometimes referred to as stock or equity) is a unit of equity ownership in the capital stock of a corporation. It can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Sha ...

cost $10.00, he invested $5,000.00, so he has 500 shares. Later after a market move, he finds his shares are valued at $3.00 a share, so he has lost 70% of his stock

. He now transfers $3,500 into the stock portfolio, in order to bring the value back to $5,000.00. He now has 1,666 shares. Later, the market recovers and his shares are now valued at $10.00 a share. His shares are now worth $16,660; he sells $11,660 and puts the proceeds into his bond portfolio. He now has $5,000 in the

and $13,160 in bonds.

Analyses

"The most prominent aspect of this plan is the ease of execution. ... An investor is always certain about

heir Inheritance is the practice of receiving private property, titles, debts, entitlements, privileges, rights, and obligations upon the death of an individual. The rules of inheritance differ among societies and have changed over time. Offi ...

fixed exposure to equities." "In any period when stock prices go up and down, or down and up, and then return to the level at which they started, a Constant Dollar Fund will produce more capital gain than a Constant Ratio operation, assuming that both accounts hold the same amount of stocks at the beginning. It works out this way because, when there are profits, the entire gain is protected in the Constant Dollar Fund, whereas only part of it is transferred to the defensive side when a Constant Ratio is used. … For the same reason, a Constant Dollar Fund is a less profitable type of formula in a period marked by steadily rising tockprices."Tomlinson, p. 158. Contrast tables 11 and 13 from pp. 148 and 161.

References

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Example

Analyses

See also

References

Further reading