Investing in a Down Market – Dollar Cost Averaging

    Published: 06-16-2009
    Views: 10,006
    Finance Expert Tom Cymer discusses being disciplined and avoiding market timing.

    Thomas Cymer: Hi! I am Thomas Cymer, Financial Planner and Founder of Opulen Financial Group. And I am talking about investing in a down market. Right now I will be discussing the fourth step, protecting your assets, dollar cost averaging. We have talked about the value of being in the market early, to receive the benefit of compounding, and often to get it on the best days. While you are investing it maybe appropriate for you to take advantage of another strategy called dollar cost averaging. Dollar cost averaging is a strategy that takes advantage of market volatility by buying more shares when prices are low. So how does dollar cost averaging work exactly? Well, dollar cost averaging doesn't try to time the market or guess when the best or worst days will occur. You simply invest the same amount of money at regular intervals. Your investment dollars will automatically buy more when prices are low, and this strategy is most effective for investors who keep investing during down market. It maximizes the value of their investments. Let me give you an example of how this works. Suppose you are disciplined about investing a $100 in a mutual fund every month. During the months when the prices of the shares are lower, you will get more shares for your $100. During the months when the prices are higher, your $100 buys you fewer shares. Now, look at the results, while your average price per share is 8.

    17, your average cost per share is 7.

    70. Now, what about people who are actually withdrawing money out of their portfolios? If however, you are taking money out of your retirement accounts or have family member who already are, you want to be aware that the math works in reverse when you are withdrawing your assets. Withdrawing too much money early in retirement when markets are down in particular, can prematurely deplete a portfolio. It's important to have at least two, if not three buckets of assets during retirement. I tell my clients planning for three specific buckets. The first is cash, which has something typically of one year of living expenses. Next comes short term assets, containing two or three years worth of living expenses, things like corporate bonds or maybe longer term CVs, try any more conservative investments. And lastly, comes the long term investments, which are more growth oriented and aimed at beating inflation. This helps to avoid, not selling investment in down market. Lets talk about controlling your emotions and getting a financial plan.