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|How can you tell when the market is at its low point? Very simply, I don't
believe you can. That's why it seems only logical that you go ahead and start investing in
mutual funds right now. Don't wait for some nebulous "market correction" that
may never come. Do it. Now.
How do you do it? Well, let's make two basic assumptions. One, the stock market is always heading generally higher. Two, the stock market will always fluctuate both up and down along that path to higher prices. If you accept both of these assumptions then there is only one answer: dollar-cost averaging.
When you dollar-cost average into a fund there is no need to worry about the market's short-term swings as long as you believe it's heading higher. Dollar-cost averaging takes all the guess work out of investing and turns it into a controlled discipline.
To dollar-cost average into a mutual fund, all you need to do is put a set amount of money into a mutual fund at certain intervals. You can do it every week, month, quarter, or year. The more often you do it the better. Instead of dropping all of your money into a fund all at once, you do it slowly. If you put it all in at once you could either buy in at the high or the low, but you can't possibly know which.
If you dollar-cost average in you will, over time, end up with a nice average price. You won't end up buying into a fund at either its high or its low. You will end up buying more when the market is low and less when the market is high. So, in other words, you will buy a lot when mutual funds are on sale and less when they are marked up.
Dollar-cost averaging is not a riskless strategy. If you need to sell your shares after a short period and the market is down you can still lose money, but over the long run it has proven, time and time again, to be a very effective investment method.
Let's say you have $1200 to invest in a stock mutual fund. The fund is currently selling at $14 a share. If you put it all in at once and the fund moved down during the next twelve months and then recovered back to $14, you would have made nothing.
Instead you decided to dollar-cost average $300 into the fund every quarter. The first investment bought you 21.429 shares at $14 each. The next quarter you invest $300 which gets you 23.077 shares at $13 each. Three months later the market falls again. Your $300 buys you 27.273 shares at $11. Finally, you invest at $14 per share again and receive 21.429 shares.
The fund then stays at $14 for a while, but you've made money because you dollar-cost averaged. You now have 93.208 shares at $14 each. These are now worth $1,305. That's a gain of $105 or 8.8%. If you had invested a lump sum at the beginning of the period your gain would have been 0%, nothing. Through dollar-cost averaging, you made money even though the market was down to flat.
Over the long haul you should always make money even if the underlying securities never go higher than your original price as long as the market fluctuates up and down in the interim. I can't find a time in the history of the stock market when prices didn't fluctuate.
Don't ever forget that dollar-cost averaging only works if you maintain the discipline. Resist the temptation to wait for the market to go 'just a little' lower. You will probably end up hurting yourself.
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