Today we’re going to let you in on a hot tip for surviving a sinking stock market.

Industry players and pundits try to convince us that they can tell when the market will hit bottom. Knowing who to believe is just as difficult as it is for them to actually pick the bottom! What’s an investor to do? In this article, we’ll explain a little-known technique that will help protect you in a falling market and let you ignore the futile attempts of those who think they can predict the market’s behavior. There is only one proven investment technique that, regardless of economic conditions, can consistently get investors in at the bottom. Read on to find out what it is, and why it is important. (Learn more, in Dollar-Cost Averaging With ETFs .)

What is the Bottom?

• Boston Globe. Aug 12, 2000 — …at these undervalued prices…we’re not selling any stock at these prices. (On Monday, Aug 14, the S&P 500 closed at 1491. Four years later on Aug 12 2004, the S&P fell a further 29% to close at 1063.)
• Wired Magazine. Dec 4, 2000 — Fred Siegel, president of investment management firm Siegel Group, believes that it is unlikely that the Nasdaq will drop more than another 200 points. (The Nasdaq fell over 1,000 points shortly after Siegel made his prediction.)
• Forbes. Aug 8, 2001 — Intel CEO Craig Barrett said the computer industry has bottomed out. (In less than a month the Philadelphia Semiconductors Index fell another 20%.)
• Market guru and former hedge fund manager Jim Cramer of TheStreet.com said it best in Jan 2001: I get paid to call bottoms. I don’t see one yet, but in my 18 years of trading I’ve never called one exactly right yet. I don’t see why this time will be any different. (Find out if DCA is right for you, in Choosing Between Dollar-Cost And Value Averaging .)

The Way In

The truth of the matter is that if hedge fund managers, mutual fund managers, private investment managers, market gurus, CEOs and analysts can’t pick the bottom, neither can we. But don’t despair, there is a means to protect yourself in the long run from the effects of a bear market as well as ensure your injection of capital into the market when it is extremely close to the bottom.

The technique is called dollar-cost averaging (DCA), and it is one of the simplest and most useful investing techniques around. DCA is simply putting a set amount of money each month into an investment such as a stock. index fund or mutual fund. Most banks will even set up a monthly automatic-withdrawals service. DCA is also ideal for the investor who doesn’t have that big lump sum at the start but can invest small amounts on a regular basis.

Example

Let’s suppose that you just got a bonus and now have $10,000 to invest. Instead of investing the lump sum into a mutual fund or stock, you decide to use dollar-cost averaging and spread the investment out over several months by investing $2,000 a month for the next five months. This averages the price over five months, so some months you may buy fewer shares, each at a higher price, and some months you may buy more shares, each at a lower price.