One of the great conveniences of investing in mutual funds is that most
fund companies make it easy to put your investment program on
autopilot -- that is, to invest on a regular basis.
Investing regularly is a great habit to develop, not just for building
wealth, but also for managing the ups and downs of the market. Investing a
fixed amount in a particular fund at regular intervals is a strategy called
dollar-cost averaging. Because the amount you invest is constant, you buy
more shares when the price is low and fewer when the price is high. As a
result, the average cost of your shares is typically lower than the average
market price per share during the time you're investing.
You're already benefiting from dollar-cost averaging if you're
participating in an employer-sponsored retirement plan that withholds money
from your paychecks. This is a convenient, systematic way to build an
investment portfolio. Because the amounts you invest remain constant, you
can easily budget for them. Dollar-cost averaging cannot eliminate the
risks of investing in financial markets. It doesn't ensure a profit or
protect you against a loss in declining markets, nor will it prevent a loss
if you stop dollar-cost averaging when the value of your account is less
than your cost. You should also consider your willingness and ability to
invest continually-even through periods of market decline-since the
advantages of dollar-cost averaging depend on your making regular purchases
through thick and thin.
No investment method can guarantee a profit if you sell at the bottom of
the market. But if you're a patient investor who contributes a fixed amount
of money in regular installments, you can greatly reduce a loss that would
result if the market dropped sharply right after you'd made a large
investment.