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The Constant Value Stock Market Investing Technique

In today's 24/7 computerized trading environment, a lot of the stock market wisdom from the 19th century has been forgotten. One over-looked technique is constant value investing.

At its most basic, constant value investing is simply buying a certain dollar's worth of a stock or fund, and then re-balancing back to this same value on a periodic basis.

For example, let's assume that you buy $10,000 of mutual fund ABC. One year later, the fund is up 12% and your stake is worth $11,200. You would then sell $1,200 worth of the fund and would have $10,000 in the fund and $1,200 in cash.

Now let's assume that, after another year, the fund is down 8%, and you now have $9200 worth of ABC. You would now take $800 from your $1,200 pool of cash and invest it in ABC. Now, you have $10,000 in ABC and $400 cash, for a total of $10,400.

If you would have just held your initial $10,000 in ABC, it would now be worth $10,304 (all stock, no cash). In this case, the difference is only $96 but, over longer periods, and wider swings, the cash really starts to build.

If you are doing constant value investing with a stock or exchange traded fund, you cannot buy or sell in exact dollar amounts. Instead, you divide the constant amount by the latest share price and then round this result to find the number of shares you need to own. Then you buy or sell shares to reach this amount.

For example, let us say that you want to maintain $10,000 in stock XYZ. At first, it is trading at $20/share, so you buy 10000/20 = 500 shares. If it then trades at $35.46/share, you now want 10000/35.46 = 282 shares (rounded). You would then sell 218 shares (500 - 282).

Constant value forces the investor to buy low and sell high.

Remember that Constant Value Investing is a basic technique on which to build a system - it is not a stand alone trading system.


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