Wednesday, April 28, 2010

Dollar cost averaging

I have recently learned the importance of Dollar cost averaging and how it can REALLY help you with the ups and downs of the market.

Dollar cost averaging is just taking your money and spreading it over a time period, instead of just investing one lump sum. Here is my own personal example. We put a certain amount per child into a mutual fund (separate from 529) for their use when they get older (ie, missions, wedding, college, down payment, whatever). I was just putting a lump sum of money into that mutual find each year, at a certain time of the year (usually when we got our bonus or tax money). The problem with doing that is, what if the day that I put the money into the mutual fund just happens to be the day that the Market hits its high and it doesn't go back for quite some time?

So recently, I realized this was not the smartest way of saving this money. So now I am taking what I would have put into that lump sum, and split it up over the months of the year and I am investing that amount of money each month into the fund (it is a fund with a no minimum addition investment). So this way, one month, I may invest on a high day, but the next I may invest on a low day. It helps even out the ups and downs of the market by doing a little bit each month, instead of the huge sum each year. Now when we get that sum, we'll just put it into savings :)

When you have your money taken from your paycheck for your 401K, you are doing the same thing every paycheck. If you are automatically investing in an IRA every paycheck you are also doing this. That is the nice thing about sharebuilder - since you are building stocks/funds and a regular basis, you are dollar-cost averaging already :)

However, if you have a large sum of money and just want to get started, do it! Get going... If at all possible it is best to invest over time, but if you have the money, get it working for you ASAP... but then start doing a bit at a time, it REALLY helps you ride out the ups and downs of the markets.

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