Dollar Cost Averaging Smooths Out Volatility
Wouldn't it be nice if you could smooth out all the rough spots in your personal investments?
Many investors have wondered just that during this frenetic market year that is constantly being buffeted by world events. Too often, they boldly invest when stock prices are high, then fearfully halt their investing or sell their holdings altogether when prices head downward.
Here's a better plan: Dollar cost averaging, which involves investing the same amount of money on a regular basis. Relentless investing of a set amount removes the faulty market-timing decisions that are so often the downfall of average folks.
With dollar cost averaging, the investor benefits from buying stocks at bargain prices when the market is down. Conversely, when stocks are up, that same investor is prevented from getting too excited and overspending on stocks that cost too much.
There are plenty of vehicles that make dollar cost averaging easy to accomplish. If you participate in an employer-sponsored retirement plan that withholds a fixed amount of your paycheck, you may already be doing this type of systematic investing. Stick with the same percentage for your account, rather than varying it based on market conditions at any given time.
"If someone is systematically investing with dollar cost averaging through either a 401(k) or regular investment account, there is an unlimited time horizon because it can go on and on," said
Besides retirement accounts, a number of mutual funds have automatic investment plans that allow you to put in a relatively modest fixed amount each month. The same goes for dividend reinvestment plans at many companies that permit you to buy their stock directly, so long as you agree to a fixed amount each month. To be cost-effective, it is important to find a plan that doesn't have sales charges or brokerage commissions every time you invest.
"Dollar cost averaging forces you to be a buyer when your head says you should be but your heart can't do it," said
While Carlson's newsletter is a longstanding proponent of the dividend reinvestment plans offered by high-quality, dividend-paying companies, he also sees advantages in diversified mutual funds as well.
One fund Carlson likes is
That fund's lead manager is
"Good mutual funds for dollar cost averaging are target funds (that adjust the asset mix as the target date approaches), balanced funds (that include stocks and bonds) and funds of high-dividend stocks that allow you to reinvest those dividends," said
To point out the advantage to an investor who keeps at it on an ongoing basis, Culloton notes the following:
-- An investor who invested
-- If the investor had invested
This "no-load" fund requires a
"When someone is just beginning to dollar cost average with a fund, I always anchor it in domestic and international blue-chip stocks," concluded Brown. "You're really trying to take advantage of the market and not an individual security."
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