Use Dollar-Cost Averaging to Help Smooth the Ride

With Wall Street’s historic ups and downs in recent years, it’s natural to be hesitant about putting large sums of money into the stock market. Yet at the same time, it’s difficult to dispute the performance record for stocks compared with bonds or cash over long periods of time.¹

For investors stuck between wanting to manage stock market volatility and hoping for higher return potential, dollar-cost averaging may help provide protection against volatility and the potential for growth.

Dollar-cost averaging requires that an individual invest a set amount of money on a regular basis, such as $200 every month in a stock mutual fund. By so doing, the investor automatically buys more shares when prices are low and fewer shares when prices rise — resulting in an overall lower average share price over time. Of course, dollar-cost averaging does not ensure a profit or prevent a loss. To take full advantage of the benefits of this strategy, an investor must be financially able to continue making purchases through periods of low price levels.

During times of market volatility, conservative investors may wonder whether the risk of stock investing is worth the potential reward. Dollar-cost averaging can help risk-conscious individuals manage market fluctuations as they pursue their goals.

1) Wiesenberger, 2003. Performance described is for the period 12/31/62 to 12/31/02. Stocks are represented by the S&P 500 Composite Index total return, which is generally considered representative of the U.S. stock market. Bonds are represented by the Salomon Brothers Corporate Bond Composite Index, which is generally considered representative of U.S. corporate bonds. Cash equivalents are represented by the average annual yield on three-month Treasury bills, which are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. The performance of an index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. Past performance is no guarantee of future results.

© 2003 Emerald Publications

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