Getting back to basics.
Increasingly, individuals have been scrambling to find places to plant their money so their portfolios will eventually turn green. A number of people fled traditional savings vehicles and entered the stock market for the first time.
However, many families faced a greater financial challenge--finding any money to invest, period. There is no doubt that more and more folks are trying to come to grips with their present financial situations.
Still, for those who don't want to miss out on any future gains in the market but are afraid of price fluctuations, the key is to get back to basics. And one of the most sensible ways to save and invest money is through dollar-cost averaging, also known as a constant dollar plan.
This moneywise strategy allows you to get accustomed to investing in all environments and it gives you discipline. The idea behind dollar-cost averaging is simple: Instead of trying to time market highs and lows, the investor regularly contributes a reasonable amount of money in a single investment vehicle or a selection of similar vehicles, such as mutual funds. This is done over a long period of time, usually at least a year.
An undisciplined approach to investing can make portfolios sensitive to shifts in market value. That is why most financial advisors often recommend "dollar-cost averaging." This money-management strategy is considered ideal for investors seeking long-term capital growth.
Using the dollar-cost averaging technique, you buy more shares when the price is lower, and fewer shares when the price is higher. This turns market ups and downs to your advantage. Since the focus is on long-term results rather than the short-term value of your holdings, it doesn't matter whether prevailing market conditions are strong or weak when you begin to invest.
Instead, what matters is that you choose a realistic program based on your individual financial situation. Once you get the program underway, stick with it.
How It Works
To illustrate how dollar-cost averaging might work to your advantage, let's assume that you decide to invest $100 in a mutual fund every three months f or one year. If the shares of that mutual fund sell for $10 apiece, and no additional charges are involved, your first quarterly investment would be to purchase 10 shares.
Now should the market fall dramatically, reducing the value of the mutual fund's shares to $5, your quarterly investment of $100 would buy 20 shares. What if the market were to rebound and the fund shares were to rise to $10 in the third quarter? Your next investment would again purchase 10 shares valued at$10 apiece.
Where would you stand after making the purchase outlined above? You would, of course, own 40 shares, purchased for a total investment of $300. With an ending market price of $10 per mutual fund share, however, your shares would actually be worth more than you paid. The total current value would be $400 versus the $300 purchase price.
You can view this strategy from another perspective. You can see that the average price per mutual fund share of the three quarters involved would be $8.33. The average cost to you, however, would have been only $7.50.
Over the period you are investing, the average cost per share of the investment is less than the average market price per share, enabling you to capitalize on price fluctuations.
Still, you just might not be able to get into the habit of investing a set amount of money each month. One solution is bank draft authorizations, in which the same amount of money is automatically deducted from your account each month. This want you don't have to worry about writing a check every month. The beauty of dollar-cost averaging--specially if the bank takes care of sending your payment--is that it is easy. However, don't be lulled into leaving your investment in one stock just because of habit. Always reexamine the company's investment prospects on regular schedule--at least once a year--and adjust your investment accordingly.
Investing in stock through company-sponsored stock purchase plans is one viable way to practice the principle of dollar-cost averaging. Some plans will let you open an account with as little as one share of the company's stock without incurring any costly brokerage commissions.
General Electric Co., for instance, is among those companies that offer dividend reinvestment as a benefit to its shareholders. This plan permits investors to purchase anywhere from $10 to $10,000 of stock every month (minus administrative fees). Again, the beauty of investing a fixed number of dollars on a consistent basis over a prolonged period of time is that you avoid buying all of your holdings at a market high.
Just as well, you could benefit from dollar-cost averaging if you belong to an investment club. The National Association of Investors Corp. (NAIC) sponsors the Low Cost Investment Plan. The Royal Oak, Mich.-based governing body represents 7,600 investment clubs nationwide.
Through this plan, you can invest small sums regularly (either monthly or quarterly) in one or more stocks of companies. Another benefit of the Low Cost Investment Plan is that it enables members to invest in the dividend reinvestment programs of corporations for a minimal one-time charge of $5 for each stock they wish to buy.
Investors are often pleasantly surprised with how quickly their monthly payments and reinvested dividends build into a sizable holding of the kinds of stocks they want to own.
One club member, for example, invested at a rate of $20 a month in a number of different companies. After 37 years, he had invested $11,280 in total monthly payments. The reinvested earnings and appreciation of the securities that he had purchased allowed him to spend $35,000 and still have an accountworth $71,000.
You may not have that long a period to invest. But the ability to stick with your original investment plan, regardless of any changes in prevailing market conditions, is the key to success in dollar-cost averaging.
This approach doesn't guarantee a profit, of course. Dollar-cost averaging does not protect an investor against the loss of stock values in declining markets. In addition, the investor is sure to incur a loss if he or she sells when the market price of the stock is below the average cost of the shares purchased. Many financial experts also urge investors to view the technique in strictly long-term goals (five to 10 years is the suggested time). Although dollar-cost averaging does have its merits, its performance as a profitable short-term vehicle lags behind other investment strategies. However, it does mean that your losses will be less if you had started to invest during bad times. And it does increase your potential to profit over the long run during good times. Essentially, following such as plan of action can help you avoid getting out of the market when it's low and rushing in when it's high.
Millions of folks are losing thousands of dollars by overpaying on their property taxes. At least that's the crux of real estate specialist Henry W. Willen's new book: Save Thousands On Your Property Taxes (Collier Books, New York). There are numerous factors that affect property taxes, such as whether or not the homeowner lives near a school or prison or whether the community has suffered severe job layoffs. Willen, who holds a Ph.D. and MBA from the University of Indiana, tells readers how to fight an unfair tax asssessment. The book, which is priced at $9.95, includes charts, worksheets and case histories.
MUTUAL FUND UPDATE
Compared to last year's gain of 36%, stock funds in general have had a mediocre year, up less than 5%. Certain funds, such as those that invest in stocks of small, growing companies, fared better the average stock fund.
The moneywise strategy for this year may be to search for small obscure growth mutual funds. In 1977, when Peter Lynch assumed the helm of the Magellan Fund, its assets were $35 million. Today, it is the world's largest fund with $12 billion in assets.
One of the largest categories of stock mutual funds is growth funds, where the earnings of companies in such funds are expected to grow faster than average. There are a number of unsung funds that could be tomorrow's Magellan, according to Personal Finance, an Alexandria, Va.-based investment newsletter.
Six undiscovered growth funds that have gained more than the S&P 500 in the last five years are: * Alger Growth Fund, 10.3%. * Alger Small Capitalization Portfolio 20.2%. * Olympus stock, 37.6%. * Founders Frontier, 14.3%. * Kaufmann Fund, 20.8%. * Stephens Emerg. Growth, 22.5%.
INVESTMENT STOCK TIP
You can double your pleasure and maybe your money by owning shares in Wm. Wrigley Jr. Co. Net sales are expected to rise 13% and net earnings could increase by 17% this year. Known worldwide for its Doublemint, Spearmint and Juicy Fruit chewing gum, the confectioner is targeting the youth with such new offerings as Beverly Hills 90210 Folder Gum. Wrigley's Extra Classic Bubble Gum now has a 10% share of the bubble gum market.
LOW DEBTS, HIGH YIELD
Investors should stop crying over low rates and low yields and start getting their finances in order. Instead of socking away extra cash in money-market funds and certificates of deposit, experts advise you put the money to other uses--pay off your car loan, mortgage or credit card balances. In most cases, the interest you save by getting rid of consumer debt will render a higher return.
BUY ONE SHARE PLAN
The financial arena is swamped with newsletters that tell you how to invest in stocks or mutual funds. One notable player is The Moneypaper which provides stock market analysis, business tips and economic projections.
The Mamaroneck, N.Y.-based publishing company is promoting a stock-buying service. The "Buy One Share" program is designed to help investors gain entry into automatic dividend reinvestment programs (DRIPS). Subscribers of the monthly newsletter can purchase stock in some 384 companies without paying brokerage fees or commissions. Once you are in the program, the same companies allow you to purchase additional shares with dividends reinvested.
The Moneypaper is worth looking into for information on investment products and consumer and business tips. For more information, call 914-381-5400.
"GOING BROKE IN AMERICA"
Vicki, a recently divorced mother of two children, was up to her neck in debt. The situation got so bad that she had even considered suicide or bankruptcy as alternatives.
Tim, married with three children, was among thousands of workers to lose his job due to the recession. Now he may lose his home.
These are real stories from the new video documentary: Going Broke In America: Bankruptcy And Your Alternatives, a 26 1/2-minute video by the American Financial Services Association (AFSA).
Going Broke focuses on people with severe debt and addresses ways in which they can resolve their financial problems. One option is nonprofit Consumer Credit Counseling Services (CCCS).
There are some 580 CCCS branches nationwide. A credit counselor can assist you in setting up a budget and deal with creditors on your behalf to work out a reasonable repayment schedule.
To inquire more about the $12.95 video, contact AFSA at 919 18th St. NW, Washington, D.C. 20006.
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|Title Annotation:||dollar-cost averaging in investment planning|
|Date:||Feb 1, 1993|
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