Investment Guide: Dollar Cost Averaging

One of the most common fears of investors, especially the uneducated investor, is deciding when to buy mutual fund shares. Everyone would like to buy in to the market when its at an all-time low and sell their shares when it's at an all-time high. This is referred to as market timing - attempting to guess when the market will go up or down. Unfortunately, nobody can consistently predict the future, so market timing is not a very reliable investment strategy. Sure, we all have a friend or relative that got lucky and made a killing on an investment - once. But to do that consistently is rare.

For the rest of us, that do not possess the ability to "read palms" or predict the future, there's Dollar Cost Averaging. This is an investment strategy that completely eliminates market timing and the anxiety that accompanies such a strategy. Dollar Cost Averaging means that you invest a fixed dollar amount on a regular periodic basis, regardless of market performance. The benefit of Dollar Cost Averaging is that you'll buy more shares when the market goes down, and fewer shares when the market goes up. This strategy should reduce your average cost per share. In the example shown below, $500 is invested each month in the same fund. Each month the price per share is different, so the number shares purchased is different. The end result is in favor of the Dollar Cost Averaging Investor, while the average price per share over the six month period was $4.04, the investor's average price per share was only $3.91 - simply because of the strategy.