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The constant dollar method is one where the amount of money invested is kept at a constant level. Let's say an investor has 50,000 dollars invested, after a certain period of time (set by the investor), the value of the portfolio will be set to 50,000 dollars again. For example, if the portfolio increases in value to 59,000 dollars and the time set by the investor has passed, then the investor would withdraw the 9,000 dollars. Conversely, if the value of the portfolio decreases to 42,000 dollars and the time set by the investor has passed, then the investor will have to deposit 8,000 dollars. This system allows the investor to take advantage of market fluctuations. A well diversified portfolio should be used with this method.
The constant ratio method requires investors to maintain a constant 50/50 ratio in the portfolio between stocks and bonds. As stock prices rise bonds are bought and stocks are sold. As stock prices decline, bonds are sold and stocks are purchased. This method, historically, is the weakest.
These methods are valid forms of investing for the long term. They can be applied to stocks and mutual funds. They provide investors with a nicely structured investing strategy.
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