Setting Up an Ongoing Investing Program

Step 1: How Can I Avoid Market High and Lows When I'm Ready to Invest?

Setting Up An Ongoing Investing Program Splash image

The first step is always the hardest. And individual investors taking their first steps in an investment program must also confront a sea of stock market uncertainty. Some plunge headlong into the market with all their savings. Others barely wet their feet before heading back to the safe shores of their money market funds. The problem, however, with these two all-or-nothing approaches is one of timing—the risk of entering the market at a high point in the market cycle.

Dollar cost averaging and its variations, such as value averaging, offer investors an alternative, allowing them to ease into the market over time, which reduces the timing risk. The mechanical aspects of averaging provide an investment discipline, require no market forecasts and are relatively simple to initiate. Most mutual funds offer automatic investment and exchange programs—a cruise control for your investment plan that eliminates the more routine aspects of maintaining an averaging plan.

Classroom Steps

The Concept

Dollar cost averaging is simple in concept: Invest a fixed amount at equal intervals and continue to do so over a long period. The result is that more shares of a stock or mutual fund are purchased when prices are relatively low and less are purchased when prices are relatively high. This can result in lower average per share cost over time.

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