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The stock market may be in a slump, but some investors are buying more shares of stock and mutual funds than ever. These investors use a technique called dollar-cost averaging. Here's how it works.
Invest a set amount each month. With dollar-cost averaging, you invest a fixed-dollar amount in the market every month. When stock prices are high, you get fewer shares for your money. When prices are low, as they are now, you receive more shares for the same dollar amount invested. The result is that the average cost per share in your portfolio tends to be lower than the average market price per share.
Avoid market timing. One advantage of dollar-cost averaging is that you don't have to worry about trying to "time" the market, predicting exactly when to invest. This approach imposes a discipline because you invest the same amount each month, regardless of where the market stands. Also, the implicit assumption is that you believe the market will eventually recover from downturns, rather than slipping into a depression which wipes out most of its value.
Decide which investments to buy. With dollar-cost averaging, you still have the challenge of deciding where to invest your fixed-dollar amount. So this technique doesn't take all the decision-making out of investing, just the timing issue.
If you're a committed investor and you're interested in minimizing the average cost of stock shares in your portfolio, perhaps dollar-cost averaging is something to consider.
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