The constant-dollar plan is far less flexible than the constant-ratio, and far less able to function well under changing market conditions. If you could be certain that the market would always trace a complete cycle of the type postulated in our example, then you could choose the constant-dollar plan with assurance that you were making the right choice. It is doubtful that such an opinion would be very reliable, however.

Another comparison of the two methods was made over the 1926-1950 period. Using essentially the same method of shifting funds between accounts, a $10,000, 50-50 constant-ratio plan would end up with a profit of $5,839, compared with $5,773 for the constant-dollar. Were the lest examples to be continued a few more years into the 50s, the constant-ratio plan would pull even farther ahead, due to its built-in advantage in a rising market. This would be especially significant in this case, because by the end of the test the constant-dollar formula is only about 30 percent in stocks, while the constant-ratio plan is still at 50 percent.

It might be worth pointing out that, since the long-term trend of the American economy has always been irregularly upward, the constant-ratio plan promises to be able to adjust itself to this gradual rise somewhat better than the constant-dollar plan. Naturally, the uptrend is subject to frequent declines or periods of stagnation sometimes of considerable duration, but the upward movement has always reasserted itself in time. The constant-ratio plan provides some protection during these periods of decline, while continually adapting itself automatically to changing market conditions.

Lucile Tomlinson presents results of a series of five hypothetical constant ratio plans, each covering 11 years in the 55-year period 1897-1951. This study includes a varied assortment of markets. Adjustments were made on a once-a-year basis, no adjustment to be made unless a certain specified percentage of upward or downward movement in the market had occurred. In three of the periods, the constant-ratio formula turned in a significantly better performance than did a “buy and hold” plan (i.e., a portfolio consisting of half bonds and half stocks at the start of each period, with no adjustments of proportions during the plan), and in the other two fell only slightly behind.

The best profit performance of the constant-ratio plan showed up in the 1919-1920 period, with a gain of 89.4 percent. The worst was in the 1930-1940 period, which produced a loss of 12.7 percent (the Dow-Jones Industrials dropped 47 percent in the same span of time). Miss Tomlinson concludes that the best results are produced by the constant-ratio formula “when stock prices fluctuate over a fairly wide range but there is no extreme in either direction.”

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