DOLLAR-COST AVERAGING AND MUTUAL FUND INVESTING

Dollar-Cost Averaging is one of the oldest and simplest investment strategies. Dollar-cost averaging is known as a “mechanical” system for investing because it requires no forecasting of financial market trends. It eliminates the guesswork so that you don't invest too much at the "wrong" time and too little at the "right" time.

Here’s how it works. Let’s assume that you $2400 to invest in a single mutual fund. Instead of investing all of your money at once, invest a specific amount on a regular schedule—e.g., $200 on the 17th of each month for a year—regardless of the current price of the mutual fund shares. Since a mutual fund will accept specific dollar amounts and issue fractional shares, you need not worry about rounding the numbers of shares up or down to an even number to make a purchase.

The time period is not important. Instead of using a monthly plan, you might prefer to invest a lesser amount more often, say every Thursday—or you could invest once a quarter. But whatever period you select, stick to it. Regularity and consistency are critical to the success of the system.

Quarter	Share Price	Amount Invested	Shares Bought
1	$10	$600	60
2	15	600	40
3	5	600	120
4	10	600	60
After 1 Year		$2,400	280

For example, if you invested your $2,400 in quarterly installments of $600 every quarter following the dollar-cost averaging principal, your transactions would break down as follows:

After the first year, you have purchased a total of 280 shares. If you had invested your whole $2,400 during, say, the second quarter when share prices were up, you would have only been able to purchase 160 shares. It's true that if you had purchased all your shares during the third quarter when prices were low, you would have been able to buy 480 shares, but would you have known to time your investment so precisely? Probably not.

If you elect to invest with dollar-cost averaging, plan to invest regularly without regard to what the market may be doing. Don’t be like those investors who tend to hesitate when the market is in a decline— either because they think they can buy shares cheaper later or because they have lost confidence in the market. Some investors may think it foolish to “throw money” into a declining market, but as we saw in the example above, a declining market provides the opportunity to lower the average cost per share of your total investment.

Mutual funds provide a very good vehicle for dollar-cost averaging because you can add small amounts regularly with minimum transaction costs. Further, by buying into a mutual fund, you achieve ready-made diversification—something you would have great difficulty doing if you were to invest directly in stocks or bonds with dollar-cost averaging.

Please bear in mind, however, that dollar-cost averaging does carry an element of risk. Dollar cost averaging focuses solely on buying shares of a single investment over an extended period and makes no provision for selling accumulated shares. The lack of a sell discipline could leave you at a disadvantage if, after years of accumulating assets, you needed cash at a time when market prices were depressed.