WHAT ARE FORMULA INVESTMENT PLANS?

By establishing a specific set of rules for investors to follow, formula plans try to take the emotion out of investing.  A formula investment plan is a systematic method of portfolio management.  Using it, buy and sell decisions are strictly dictated by security price movements and the changes in individual security weightings that result within a portfolio.

Often, formula plans divide an investor's portfolio into two portions: speculative and conservative.  The speculative portion contains aggressive, volatile securities with the potential to earn large returns or create significant losses.

The conservative portion holds less-volatile securities—such as government bonds—that are expected to grow slowly but steadily.

Investors carefully monitor the speculative portions of their portfolios.  As this component changes in value, formula investors add to, or reduce, their positions to maintain a pre-determined level of ownership of speculative securities.  This level of ownership is simply measured in dollars in the constant-dollar plan.  In contrast, a constant-ratio plan maintains a set percentage of the overall portfolio value in speculative securities. 

Now let's look at a specific type of formula investment plan.