Question: Would you recommend the use of a dollar cost average strategy? What does it mean to the typical BuyandHolder?

Thanks,

Jesus Devesa

Answer: Dear Mr. Devesa,

The answer is yes and a definite yes. It is a particularly sound way to build your portfolio during volatile markets, such as the one we’re experiencing right now.

What Is Dollar Cost Averaging?

When you dollar cost average you invest a specific dollar amount at regular intervals — once a week, once a month, once a quarter — whatever works for you financially.

The result is that when the market is down, you buy more shares of a stock or mutual fund and when it’s up you buy fewer shares.

It’s a little bit like a 401(k)plan. In 401(k)s and similar retirement savings plans, employees have a specific dollar amount automatically taken out of their paychecks and invested in the funds they have selected.

Whether it’s in a retirement savings plan or your brokerage account at BUYandHOLD, the results are the same — you buy more shares when prices are down, as they are now. This should reap impressive benefits when the market turns bullish.

An Example.

Researchers at USA Today conducted a test comparing lump sum investing versus dollar cost averaging for a 12 month period running from March to March. They studied what happened to a $1,200 investment in Spiders, the exchange-traded funds that track the S&P 500 Index. The two scenarios were:

1) $1,200 invested at the beginning of the time period

2) $1,200 invested $100 a month for 12 months.

At the end of 12 months, both investors lost money, but the dollar-cost-averaging investor lost less. He/she lost $140 while the lump sum investor took a hit of $989.

The Advantages.

When the market is rapidly rising, dollar cost averaging is not always the best way to invest, especially if you are the type that pays close attention to the market and individual securities.

However, I recommend it for the average investor — the person who doesn’t have a lot of money to move around from one stock to another and for those who tend not to pay regular attention to their portfolios.

It’s also a low-stress technique — you’re involved in the market but you’re not trying to predict its movement on a minute-by-minute or day-to-day basis.

More Information.

• The Investment Company Institute has a clear example of how investing $100 a month, using dollar cost averaging works. Go to: www.ici.org/investing_for_success/dollar.html.

BUYandHOLD does not recommend any securities. The security mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. Your results may vary depending on market conditions.