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A constant dollar plan is a type of investment strategy that is utilized 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-crafted constant dollar plan will work regardless of whether the market moves 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. The purchases tend to be in smaller lots and occur over a period of time. Depending on the current price, the investor will either buy fewer units or more units of the security. Safeguarding in this manner helps the investor to pursue a particular investment, but in a manner that does not open the investor to as much risk as purchasing huge lots of units at one time.
The general flow of a constant dollar plan is simple. During periods where the prices for the securities are going through a period of falling, the investor will increase the number of units purchased. When a period of rising prices come into play, the investor cuts back on the number of units purchased, and remains in that mode until the price per unit levels off and begins to drop back into the range of the fixed dollar amount.
One of the keys to creating a workable constant dollar plan is to set realistic fixed dollar amounts. While every investor would love to obtain shares 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 acquiring shares of the security, he or she must analyze the performance history of the stock and use that data to come up with a fixed dollar amount that represents a reliable purchase 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 makes it possible to incrementally acquire shares of stock, but without as much risk.
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