Ratio Alternatives to Constant Value Investing

Rebalancing stocks or funds to ratios is an alternative idea to constant value investing.

The only thing is that, instead of considering your cash as a single pool, you have to track your cash separately for each of your positions.

Constant Ratio Investing: Rebalance the stock or fund periodically to a constant ratio (i.e 65%).

Variable Ratio Investing: Rebalance the stock to a different ratio, depending on the stock's performance. Since we want to buy low / sell high, we balance to a higher percentage as the stock goes down.

So, instead of 65%, we can use a formula like 1 - 0.5 *(price/high) to get the percentage.

Here, "price" is the current price while "high" is the highest price seen so far. When you start trading a stock, high = price. Whenever the price makes a new high, high changes.

1 - 0.5 * (price/high) will make you 50% invested at the highest price, while you would reach 100% when the stock reached 0.

For example, let us say you buy a stock at 5. Now price = 5 and high = 5.
Then, the stock goes to 2. the formula now says you should own 1 - 0.5 * (2/5), which equals 80%.

So, at a price of 2, you want to be 80% invested in the stock.

You may want to use the formula 1.5 - (price/high) instead, especially for a fund.

This would still have you 50% invested at the high price, but it would reach 150% at price 0, which means that it would have you 100% invested when the stock dropped 50%.

Yet another option is to use (high - price) / (high - low), where the high and low are chosen based on technical or historical price points. This way, you would be completely sold out at the historical high, completely in at the historical low, and partially invested at in-between prices.