HOW DOES THE CONSTANT-DOLLAR PLAN WORK?

In a constant-dollar plan, the investor establishes a specific dollar amount for the portfolio's speculative portion, and puts the rest of the funds into the more conservative portion.  The investor then sets "trigger points," slightly above and below the constant-dollar amount.  Trigger points are used so that shares are not bought or sold in reaction to everyday market ups and downs.

When market movements cause the dollar value of the speculative portion of the portfolio to rise or fall past a trigger point, the portfolio is rebalanced, so the dollar amount invested in the speculative assets remains constant. 

For example, let's say an investor wishes to maintain $1,000 of his portfolio in a speculative high-tech stock.  If the price of the stock is $10 a share, the investor has 100 shares of the stock.  If the price of the stock rises to $20 a share, the investor would own $2,000 of the stock.  To maintain his constant-dollar plan, the investor would sell 50 shares ($1,000) and reinvest the gains in more conservative investments, such as Treasury bonds. 

Conversely, if the value of the high-tech stock falls below the desired constant-dollar trigger point, the investor would sell some of the conservative investments and buy more shares of the tech stock.

There is another way investors can try to create a constant amount of a given security in their portfolios.