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Alex Bell has been buying Investment
Funds (Mutual
Funds) on a monthly basis and, like other investors, has found the
average cost of each unit to be much lower. But why has Alex decided to
invest like this? The answer is a simple one; to save money that otherwise
might filter through his fingers. By following a simple principle called dollar-cost
averaging, practiced on a monthly basis and over several years, Alex
has found that the average cost of each unit is much lower than lump sum
purchases. Dollar-cost averaging works when regular purchases
are made with a fixed amount of money, and continue regardless of the
unit price. Alex buys more units when prices are lower and fewer when
unit prices rise. For example, if the price of an investment fund unit
moves from $20 to $25 to $12 over a three-month period and you are committed
to spending $100 per month, you will end up buying more of the units in
the last month than in the two before and pay a lower average price. Dollar-cost averaging works well for Alex and his wife
since both like to invest their money in monthly installments. They feel
that it is easy to part with small amounts and they don't seem to miss
it. "Anybody who has had trouble saving would
benefit from a forced savings plan," says Martin Kosterman of Fiscal
Agents. With current technology, an investor can get into a
mutual fund for as little as $50 per month and in some cases, have the
money taken right out of their bank account (PAC)
. Another thing that the Bell's like about investing
on a regular basis is that they don't have to make decisions about when
to buy and how much to buy. "You might wait until prices come down,
but they may never come down," Alex says. Kosterman reminds us that Dollar-cost averaging is
the best way to beat a volatile market, or one that may be poised for
a slide. "Over the long term," he says, "dollar-cost averaging
always comes out ahead. You can never pick the markets all the time." It is the diversification
provided by mutual funds as opposed to buying a single or small group
of blue
chip stocks that allows for regular contributions. Because dollar-cost averaging acts as a self-correcting
feature on the price of mutual fund investments over the long term, investors
should stay with a program regardless of the economic
conditions. Also consider buying more over and above the regular monthly
purchases, when the unit price of a fund is in decline; because it will
lower the overall average cost. The decision to save a portion of one's income is the foundation of any investment plan . The key to getting the most out of the plan is to put the money away and leave it there. That means you have to calculate how much you can spare each month, remembering that an investment plan should be tailored to your specific needs. You are not locked into a contractual plan nor should you over burden yourself with unrealistic goals. For further information on dollar-cost averaging
and investing in mutual funds Call (905) 844-7700.
Have a question regarding this article? Use our feedback form to send us a note. © , Fiscal Agents Money Management Newsletter
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