Saturday, August 16, 2008

Dollar Cost Averaging---Is It A Good Idea?


The concept of dollar cost averaging is that you take an amount of money say $200 and invest it at the same time every month or every quarter, what ever! You just invest the same amount at the same interval. When the market is low you pick up more shares of a particular stock or mutual fund. Over a long period of time like several years this technique helps to reduce market risk and effectively helps you to save and invest. If you invest in a mutual fund this will also help you to reduce the risk of a particular company as well.


If you have a gigantic amount of money to invest like an inheritance, I would invest the whole enchilada at once rather than eek it out over time using the dollar cost method. I think that a sound portfolio over the same period of time would give you a better return. I mean, I would never let a large chunk sit in a savings account slacking off like a loser when it can be working for me! A good mix for a portfolio is to take 100 and subtract your age--put this percentage into stocks, take %10 and keep it in cash and put the rest in a bond fund or Treasury bonds, or corporate bonds.


If you are struggling to save and invest I would go with the dollar cost averaging technique. You can set up a good stock mutual fund for about $2500 and add the $200 at the same day of each month. You can have the amount automatically transferred into your investment account.


If investing is new to you, select a brokerage house that has a good reputation and that has been around for a long period of time. My favorite is Fidelity Investments. They have excellent customer service and management.