Listen to a Business English Dialogue about Constant ratio plan
Jordan: Hi Madelyn, have you heard about the “constant ratio plan” in finance?
Madelyn: No, I haven’t. What is it?
Jordan: It’s a strategy where an investor maintains a constant ratio of investments in different asset classes, such as stocks, bonds, and cash equivalents.
Madelyn: Why would someone use a constant ratio plan?
Jordan: It’s used to maintain a balanced and diversified portfolio, helping to manage risk and potentially improve long-term returns.
Madelyn: How does a constant ratio plan work in practice?
Jordan: The investor periodically rebalances their portfolio to bring it back to the target asset allocation, buying or selling assets as needed to maintain the desired ratios.
Madelyn: Are there any drawbacks to using a constant ratio plan?
Jordan: One drawback is that it requires regular monitoring and adjustments, which can be time-consuming and may incur transaction costs.
Madelyn: Can you give an example of how a constant ratio plan might be implemented?
Jordan: Sure. Let’s say an investor has a target asset allocation of 60% stocks, 30% bonds, and 10% cash. If the stock market performs well and the stock allocation increases to 70%, the investor would sell some stocks and buy bonds and cash to rebalance the portfolio back to the target ratios.
Madelyn: How often should an investor rebalance their portfolio under a constant ratio plan?
Jordan: It depends on individual preferences and market conditions, but some investors choose to rebalance quarterly, semi-annually, or annually.
Madelyn: It seems like a constant ratio plan can help investors maintain a disciplined approach to investing.
Jordan: Absolutely, it’s a straightforward strategy that can help investors stay on track with their long-term financial goals.