Variable Ratio Investing

A contrary investing strategy that aims to take advantage of the overall direction of the stock or bond market by increasing stock holdings when the market is weak and increasing bond or cash holdings when the market is strong.

According to Wealth Enhancement & Preservation, ""Variable-ratio investing is another timing method that works in concert with the market. Basically, you change your portfolio with the market. When the stock market goes up, you lower your equity exposure by selling a part of your shares and moving your funds into cash. For example, if your overall asset allocation is 60 percent cash and 40 percent equities and the market drops by 10 percent, you would increase your percentage equity exposure.""

Some advocates of variable-ratio investing say it helps you follow the golden rule of ""buying low and selling high."" That's because every time the market takes a big drop, you buy more stock at a discounted price and will be well positioned when the market moves higher again.

However, if you're locked into a formula that calls for increasing your stock position as the market gets weaker, the value of your overall portfolio will also probably decline. And if the market is heading higher, a policy of increasingly shifting out of stocks will mean that your returns will suffer if the bull market lasts for months or even years.



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