We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Constant Ratio Plan?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 6,769
Share

Constant ratio plans are examples of an investing approach that defines the contents of a portfolio based on asset classification. Essentially, the constant ratio plan seeks to establish a balance between the types or classes of investments that are maintained as part of the investor’s holdings. The purpose of this kind of investment strategy is to make it possible to stabilize the value of the portfolio by moving money between the assets so that a minimum overall worth is maintained, regardless of the performance of the individual securities.

In a sense, the constant ratio plan is somewhat like applying the principle of a scale. When items on each side of the scale are more or less equal, the scale is understood to be even. The same is true with a constant ratio plan. When all the securities are maintained at a certain value per class or type of security, the portfolio is balanced and considered to be even or level in nature. If one security begins to underperform, this throws the portfolio out of balance, and requires a redistribution in order to regain an equitable level of allocation per security.

Generally, the constant ratio plan calls for being able to utilize the same securities to restore balance when one or more securities go through a slump. This is accomplished by moving money associated with other securities in the portfolio over to cover the losses generated by the underperforming securities. Just enough is moved to restore the balance, and help to cover the downward trend until it is clear whether or not the security will recover and begin to rise again.

Using this sort of asset allocation is a popular way of holding on to shares of stock that the investor considers highly desirable. If the suspicion is that a given security will recover and begin to perform after a period of time, a constant ratio plan minimizes the overall loss and allows the investor to justify hanging on to the security in the interim. This approach is often employed with long established stocks that go through a slump, but are expected to recover, even if the recovery time is considered long term.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-a-constant-ratio-plan.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.