Dollar Cost Averaging



Nilus Mattive discusses a strategy known as dollar cost averaging. Mr. Mattive explains how the long term investing strategy is a good idea for some investors.

One day the Dow loses hundreds of points. The next day, investors are bidding up share prices, certain they've seen the worst of the subprime mess. It's no surprise that so many people believe that taking a long term perspective just doesn't work. However, Mattive disagrees with the idea that frequent trading is the only way to build up a portfolio in an ever changing market. Mattive suggests using a strategy known as dollar cost averaging.

Despite the name, dollar cost averaging has nothing to do with currencies at all. Instead, it refers to buying equal dollar amounts of the same investment on a predetermined schedule. For example, an investor decides to invest $10,000 in a stock. Rather than deploying the entire amount at one time, he could instead opt to purchase $1,000 of the stock on the first day of each of the next 10 months. The logic behind this approach is the investor can expect just about any stock's price to vary substantially over a ten-month period. So, when the price is higher, the$1,000 will buy fewer shares; when the price dips, the $1,000 will buy more shares.

Buying equal dollar amounts over time allows the investor to reduce his risk to a stock's short-term price movements, automatically encouraging him to buy more when prices are lower and less when prices are higher. It also removes much of the emotion from the investing process. The shareholder already committed to buying the stock at regular intervals, regardless of market conditions. And because this is being done automatically, it doesn't require more than a few minutes of time.

However, this strategy is not perfect. There are at least two potential disadvantages that come with the strategy:

1. The investor might pay more in brokerage fees because of the multiple transactions. However, since low discount broker fees are available, that's not quite the concern it once was. Some brokerages, such as www.sharebuilder.com , have even built their entire businesses around the concept of dollar cost averaging.

2. An investor might miss out on a substantial gain if a stock's price takes a sharp turn higher.

"Still, I think it's a sound approach for core stock portfolio, especially when it's used consistently. It smoothes out risk and allows investors to regularly participate in the market's rallies. It is a perfect way for investors with limited funds to regularly put a little money to work," Mattive states.

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http://www.moneyandmarkets.com/Issues.aspxNewsletterEntryId=1893

About NILUS MATTIVE & MONEY AND MARKETS     

Nilus Mattive, a financial analyst at Weiss Research, is the editor of Dividend Superstars, a monthly publication and is also the editor of the company's daily e-letter, Money and Markets. Formerly a senior editor of Standard & Poor's The Outlook, the oldest continuously published investment newsletter in the country, he has written for a number of investment websites, including BusinessWeek and Individual Investor. Mr. Mattive is the author of The Standard & Poor's Guide for the New Investor (McGraw-Hill, 2004) and has appeared on the popular investment radio show, Traders Nation, to discuss his views on personal finance.

Mr. Mattive graduated cum laude from the University of Scranton.

Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.





Dollar Cost Averaging