Retirement & Financial Planning Report

When steaks or shoes go on sale, more people want to buy. However, when stock prices go down, many investors bail out. If you follow this strategy, you buy high and sell low, which reduces your long-term returns.

A strategy known as dollar-cost averaging can help you avoid this unprofitable behavior. You might invest a fixed amount in a stock or fund each month, say, or every two week. Then you’d buy more shares when prices are low and fewer shares when prices are high, which decreases your cost-per-share. A lower cost-per-share, in turn, will produce a larger gain or a smaller loss when you eventually sell that stock or fund.

Suppose, for example, you invest $200 in a mutual fund every month. When that fund is priced at $10 a share, you’d buy 20 shares. If it trades at $8 one month later, you will buy 25 shares. Altogether, you’d have 45 shares bought for $400, so your cost is $8.89 per share. If the price moves back up to $10, you could sell at a profit, even though the price hasn’t risen from the amount you originally paid.