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Strategy
Dollar-cost Averaging: A Simple Strategy for Uncertain Markets
By Paul Klehr
Financial Advisor, Howe Barnes Hoefer & Arnett, Inc.
Many people believe that smart investors can “time” the market—investing on dips and selling at the high points—to make large amounts of money overnight. While this occasionally does happen, it is very rare. Mutual funds offer a simple, convenient, more realistic and less time-consuming method of investing in a portfolio of securities (such as stocks and bonds), than trading them individually.
Help Reduce Risk
Through mutual funds, investors can delegate decisions to the funds’ professional money managers—decisions such as what securities to hold, when to buy, and when to sell. They can also access a broader diversity of securities than they could by investing on their own—and diversity reduces risk.
A sizeable number of mutual fund shareholders have built investment accounts by systematically purchasing shares over long periods. These "accumulating investors" include individuals who pay as little as $25 a month into accounts. They are taking advantage of one the simplest and most popular methods of building an investment account -- dollar-cost averaging.
Regularly Scheduled Investments
Dollar-cost averaging systematically invests equal dollar amounts in securities at regular intervals, whether the trend in the stock market is downward, upward or uncertain. Investors thus purchase more shares at low prices and fewer shares at high prices, consistently lowering the average cost per share below the average price at which shares are purchased.
The system’s success depends on maintaining the schedule of periodically contributing equal amounts to the same securities. Of course, it does not guarantee against loss in a steadily declining market.
Long-term Offers Best Results
A dollar-cost averaging program should be used only for long-term purposes, such as building a retirement or educational fund that will not be needed for a number of years. Some risk of investing in securities is reduced by the fact that purchases are certain to be made at a variety of prices.
No one knows for certain which way the market is going from day-to-day, month-to-month, or year-to-year. Only one thing is constant—the market will change. Since all markets will go through cycles, your chances of making money are better with regular investment of a fixed dollar amount than guessing when your mutual fund is sitting at its low point.
When investing in a mutual fund, investors should make sure that they are educated consumers. Information about a fund, including charges and expenses, is contained in the fund's prospectus. You can request a prospectus from your Financial Advisor. Successful dollar-cost averaging requires that you stick to your plan, regardless of what the market does. Make sure you select an amount that is consistent with your financial means, so that you can continue to purchase shares even through periods of low share prices.
Dollar-cost averaging cannot guarantee a profit or protect against a loss in a declining market. But if you have the patience to ride out the tough times and stick to your regular investing schedule, it can provide definite advantages.
The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Since such a plan involves continuous investment in securities, investors should consider their financial ability to continue purchases through periods of low price levels. Securities offered by Howe Barnes Investments, Inc., member NASD and SIPC.
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