Stock option trading – AN INFORMAL PLAN Actually, the plan is an extremely informal one, and the disadvantages mentioned above are not terribly serious in practice.

Investors who use such a plan are interested in getting some advantages of owning common stocks, without incurring undue risks, and the constant-dollar formula presents a practical approach. The amount of stocks to be held is a matter of individual preference. Our investor above could have chosen $5,000 as his stock proportion, just as well as $10,000. Over a long period of time, the method produces satisfactory results. One study1 shows results of a hypothetical test of the method over the 1926-1950 period, starting with a $10,000 fund, $5,000 of which was to be held in stocks, and using the Dow-Jones Industrials as an action indicator. Additional purchases are specified at every 20 percent decline in the Dow-Jones Industrials, and sales at every 25 percent advance.

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