Invest in the Market

              When is a good time to invest in “the market”?  This is a common question from those of you who are skittish about investing given the stock market volatility and disappointing average returns over the last decade.  Can one predict with certainty when to jump into the market?  The answer is “no”.  However, there is an investment strategy one can employ that is an alternative to trying to time the market.  The strategy is known as dollar-cost averaging.  How does dollar-cost averaging work?

              Dollar-cost averaging is investing a set amount of money on a regular basis for an extended period of time.  Those of you who participate in a 401-K, 403-B or Simple IRA at work automatically employ dollar-cost averaging as you’re taking so many dollars out of your pay and sending it to the investments of your choice every pay period.  Another more voluntary approach would be to have a set amount of dollars wired from your bank account to the investments of your choosing on a regular basis.   

At the end of this piece is a chart that shows a hypothetical dollar-cost averaging strategy over a 10 month period.  Each month, $100 is invested.  The share price of the hypothetical investment was different every month a purchase was made, as you would expect, and as a result, the number of shares purchased varied month to month.  So after 10 months $1,000 was invested (10 x $100) with a total of 114.28 shares being purchased utilizing dollar-cost averaging versus only 100 shares being purchased if they were all bought in month one ($1000 investment / $10 per share = 100 shares).  Assuming that at the end of the 10 month period, the share price was equal to the initial share price of $10, then the investment would be worth $1,142.77 (114.28 shares x $10 per share) utilizing dollar-cost averaging and $1,000.00 (100 shares x $10 per share) if the shares were all bought in month one.  Utilizing dollar cost averaging the investment was worth an additional $142.77.

              Please note the illustration is just an example of how averaging works.  It does not depict an investment in any particular product.  Your investment may lose value.  Your personal experiences will vary but if employed for long periods of time dollar cost averaging can be beneficial.  It can help take away some of the fears you might have about when is the right time to invest.

Dollar cost averaging does not ensure a profit nor does it protect against a loss in declining markets.  It involves continuous investment in securities regardless of fluctuating price levels.  An investor should consider his/her ability to continue purchases in periods of low or fluctuating price levels.

114.28 shares purchased x $10.00 cost per share = $1,142.77 ending balance