Cost Averaging - It Makes Sense (Dollars & Cents)


It's no secret that the market goes UP...the market,goes DOWN. That's the basics of Investing 101.

For many of us the shape of the market day to day hasabout as much influence on our lives as the time of thetides that day. But for investors - especially firsttime investors - it can be a rollercoaster of heartracing highs and stomach churning lows. Every movementis being carefully reviewed and if it turns down theninvestors with itchy feet jump out.

If you know the benefits of investing, how can youavoid the stress of putting your hard earned money intothe market?

Financial planners and investors are quite clear on thesubject. New investors should not make an investmentunless they are going to let it sit at least 5 to 7years - the longer the better.

Why?

Well, the economy DOES move up and down, but we havenever seen it bottom out (and if it did - well, you'dhave much bigger concerns than your investment).

By selecting a diversified portfolio, such as a mutualfund, you can usually base your prediction on pastactivity and you'll see that in any 7-15 year periodthe investor always came out with more than he put in.

How do you take advantage of that? When should youinvest?

Well, if shares were being sold for $10 each and youhad invested $100 you would have purchased 10 shares.Now, if that is your whole investment you would be veryupset if the value went down to $5, wouldn't you? Nowyour stock is worth $50. What would you do? Sell beforeit goes lower and loose $50?

Using the 'Cost Averaging' technique:

Cost averaging means you continue to put the sameamount of investment into the market regularly -preferably every month. Now if you did that you wouldhave invested another $100. At $5 a share you would buy20 shares. Right now you have invested $200 but onlyown $150 worth of shares.

What happens when the price goes up?

When the price goes back up (and it will) it may stopat $8 per share. Now what? Well, you invest your next$100 and buy 12 shares.

You now have 42 shares valued at $8 each. That totals$336. Your investment was $300 so you just made 12%off of your investment.

Combining the cost of averaging with the 10%recommended for us to set aside for savings orinvestment - what's stopping you from jumping in?

Lucy Vestirian is the webmaster for http://www.fyinvest.com which is the premier investsite on the Web. Visit http://www.fyinvest.com tolearn about different investment ideas and strategies