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# Constant Dollar Investment Strategy

Constant dollar investment is a strategy that attempts to keep a fixed dollar amount allocated to each of the various types of securities contained in a portfolio. The constant dollar technique works well when the total available investment dollars are allocated to two different investment types: one amount going to the more speculative instruments of the portfolio and the rest being used for more conservative offerings. This fixed dollar ratio between the two parts is typically regulated by either the buying or selling off of stocks.

The strategy works in this manner: let's assume, for example, that an investor has a portfolio with a total value of $100,000; of that total he wants to keep $50,000 invested in stocks and the rest allocated to bonds. When the value of the stock half of the portfolio increases to an upper limit (which is set by the investor), stocks are sold off so that the total market value of the stocks remaining in the portfolio is reduced to $50,000. So, if the upper limit set by the investor was, say, $60,000, when the value of the stock side of the portfolio reached that amount, $10,000 in stocks would be sold to reduce stock values back to $50,000. The $10,000 proceeds would be invested in additional bonds. If the stock in the portfolio declined to a lower (predetermined) limit, then additional stocks would be purchased to increase their total value back to $50,000. This type of plan forces the investor to take profits when the upper target amount is reached and to buy additional shares when the value falls to the lower target number.

This investment strategy works well for those investors who are somewhat risk adverse. By maintaining a fixed dollar amount in stocks and transferring the profits in excess of that fixed amount into the less risky investment instruments, conservative investors can still pursue a reasonable measure of growth for their portfolios. However, if stock prices continue to rise, the constant dollar plan will not offer as great a return as a buy-and-hold strategy. Furthermore, if the stocks chosen for a constant dollar plan don't fluctuate much in price, they won't work to enhance the overall value of the portfolio because the upper and lower target amounts will never be reached. Therefore, this type of plan performs best with stocks that fluctuate in price along with those that have good potential for long-term appreciation.

An investor who implements the constant dollar strategy must not only take great care in selecting the proper securities for the plan portfolio, he or she must also make decide what the constant dollar amount should be, as well as the upper and lower limits to set. A conservative investor might allocate too small an amount to stocks, which could result in a lack of overall growth for the total investment portfolio. On the other hand, too large a constant dollar amount allocated to stocks might cause that same investor to take on more risk than he's comfortable with. A more aggressive, growth-oriented investor would typically be expected to allocate a greater dollar amount to the stock side of the portfolio.

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