Developing a Dollar Cost Averaging Plan

No one can afford to have his or her investing plan be forgotten
or relegated to the back burner. You need to set up a
plan for making set, regular investments. This way, you can
ensure that your money is working for you even if your best
intentions are diverted.

Dollar cost averaging is a way to ensure that you make fixed
investments every month or quarter, regardless of other distractions
in your life. Dollar-cost averaging is a simple concept:
You invest a specified dollar amount each month
without concern about the price per share or cost of the
bond. The market is fluid — the price of your investment
moves up and down — so you end up buying shares when
they’re inexpensive, some when they’re expensive, and some
when they’re somewhere in between. Because of the commission
cost to buy small amounts of stocks or bonds, dollar
cost averaging is better suited for buying mutual funds.
If you have a

401(k) plan at work, you already have experience
with dollar cost averaging. You fill out the forms for the
plan and direct your payroll department to take a certain dollar
amount or percentage of your pay every payday and use
it to buy the mutual funds, stocks, bonds, and/or money
market account you’ve selected. Investing this way is important
for your retirement accounts and your financial plans:
It’s the only way most of us can grow our money in a consistent
manner.


In addition to helping you overcome procrastination about
saving for investments, dollar cost averaging can help you
sidestep some of the anxiety many first-time investors feel
about starting to invest in a market that can seem too overheated
or risky. With set purchases each month or quarter,
you buy shares of your chosen investments regardless of how
the market is doing.

Dollar-cost averaging isn’t statistically the most lucrative way
to invest. Because markets rise more often than they decline,
you’re better off saving up your money and buying stocks,
bonds, or mutual funds when they hit rock bottom. But dollar
cost averaging is the most disciplined and reliable way to
invest. Consider this: If you set up a dollar-cost averaging
plan now, then in 10, 20, or 30 years, you’ll have invested
every month in between and accumulated a pretty penny in
the interim.

Most mutual funds let you start out on a dollar cost averaging
plan (or automatic investing plan, as they’re also called)
for as little as $50 or $100 a month. The only catch is that
you have to sign up to allow the fund to take the money from
your checking account each month. To find out if the funds
you’re interested in offer the service, look for the information
in their prospectuses or call their toll-free shareholder services
phone number.