Constant dollar plan

When institutions first started to invest in the stock market, one of the first types of plans they came up with was the constant ratio plan, often called rebalancing. Another type of plan is called a variable ratio plan, there are all types of ways of doing these plans. The simplest is called the "Constant Dollar Plan", this plan has been discussed in a lot of investing books. How it works is very simple. Say you have $ 10,000 dollars to invest, you invest half into stocks, and the other half into bonds or a money market fund. Say your shares cost $10.00, you invested $5,000.00, so you have 500 shares. Later after a market move you find your shares are valued at $3.00 a share, you have lost 70% of your portfolio. You now transfer money into the stock, to bring the value back to $5,000.00, you add $3,500 dollars. You now have 1,666 shares. A while later you see that the market has recovered and you shares are now valued at $10.00 a share. Your shares are now worth $16,660 you now sell until you only have $5,000 in the market. You now have $5,000 in the stock market and $13,160 in bonds. That is the Constant Dollar Plan in a nutshell.

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1. ^ Practical Formulas for Successful Investing by Lucile Tomlinson