DOLLAR COST AVERAGING

Trying to make a financial killing by timing or "beating the markets" is sometimes a temptation, but it's a strategy that rarely works. Investing is most productive when done over the long term and, in a long race, the tortoise investor will always beat the hare. Rather than trying to time markets, use a strategy recommended by many investment advisers called "dollar cost averaging".

Dollar cost averaging is investing the same amount weekly or monthly. Because prices fluctuate, you will buy more shares when markets are low; when markets are high, you will buy fewer. It's like waiting for the Boxing Day sales.

By following this strategy, you can often lower the average cost of your investments. If you have lower costs coming in, you will have more profit going out.

Suppose you decide to invest $100 per month in a mutual fund. If the fund's units cost $10 each, you can buy 10 units the first month. If the fund's unit price over the next three months is $11, $9, and $8, you will buy 9.09, 11.11, and 12.5 shares each month for a four-month total of 42.7 units.

This is 2.7 units more than if you had invested all $400 at $10 per share in the first month. Because you have more units, your average unit cost is less, and you will have more profits.

There are a number of advantages to dollar cost averaging. You don't have to guess when to buy, and you might be able to sleep better at night. You don't have to invest a large amount all at once; smaller amounts are easier to work into your budget. There is no need to study trends or be a market expert -- professional money management is what the mutual fund provides.

Most importantly, dollar cost averaging eliminates the temptation to buy wildly when the price is increasing and stop buying when the price is going down. Many investors feel this tug, but the end result of the temptation is that you buy high. Dollar cost averaging, by contrast, follows the classic advice, "Buy low and sell high".

Let's take another example of dollar cost averaging when prices are moving up and down. Your budget allows you to invest $200 per month for six months.

Month

Unit Price

Units Bought

Amount Invested

Total Value

1

$15

13.33

$200

$200.00

2

$13

15.38

$200

$373.23

3

$14

14.29

$200

$602.00

4

$12

16.67

$200

$716.04

5

$16

12.50

$200

$1154.72

6

$15

13.33

$200

$1282.50

Average Price

Total Units Purchased

Average Cost Per Unit

$14.17

85.50

$14.03

Your average cost per unit is lower than the average price of the fund. Your $1200 invested over six months is now worth $1282.50, a gain of 6.9 per cent. If you had invested your total of $1200 in month one, you would still have only $1200 in month six because the price returned to your original $15 purchase price, providing there were no dividends paid by the fund and re-invested in the meantime.

Dollar cost averaging can lower your average price and increase the number of units you can purchase.

Dollar cost averaging is offered by many mutual funds, and you can often set up an automatic investment from your bank account. Talk to your investment adviser about dollar cost averaging. It's a great way to begin a regular investment plan, and it can be very productive in the long run.