A constant dollar plan minimizes investment risk by reducing volatility. Securities are purchased in fixed dollar amounts, with fewer units bought when prices rise and more when they fall. Setting realistic fixed dollar amounts is key.
A constant dollar plan is a type of investment strategy used to maximize the chances of a return on an investment by minimizing the degree of risk associated with the investment. The main focus of this type of strategy is to find ways to reduce the rate of volatility currently associated with the investment option. Ideally, a well-designed constant dollar plan will work regardless of whether the market goes up or down.
Sometimes referred to as dollar cost averaging, the usual approach in a constant dollar plan is to purchase the securities in fixed dollar amounts. Purchases tend to be in smaller batches and occur over a period of time. Depending on the current price, the investor will buy fewer units or more units of the security. Protecting in this way helps the investor to make a particular investment, but in a way that does not open them up to as much risk as buying large numbers of units at once.
The general flow of a constant dollar plan is simple. During periods when stock prices go through a falling period, the investor will increase the number of units purchased. When a period of rising prices comes into play, the investor reduces the number of units purchased and stays in that mode until the price per unit levels off and begins to fall back within the fixed dollar amount range.
One of the keys to creating a viable constant dollar plan is to set realistic fixed dollar amounts. While all investors would love to get stocks at the best possible prices, the fact is that not all stocks or mutual funds will allow this to happen on a recurring basis. This means that if the investor is serious about buying shares of the security, they should analyze the stock’s performance history and use that data to arrive at a fixed dollar amount that represents a reliable buying range. Researching past history and using the information to determine a realistic dollar amount will often create the perfect foundation for a constant dollar plan, one that allows you to purchase shares incrementally, but without as much risk.
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