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Dollar cost and value averaging strategies
A dollar cost average strategy is a particular way of investing in the same mutual fund over the course of several months. When you use dollar cost averaging you simply invest the same amount in the fund every month without any variation. If the price of shares in the fund goes down, this means that the same amount of money invested at that time will purchase more shares. If the price goes up then the same investment will purchase fewer shares. This is supposedly a technique that results in a general lower cost of the shares on average, assuming that the price of shares goes up and down. Value averaging is a little different. Like dollar cost averaging it is a method that allows you to invest several times over many months in a single mutual fund. When you value average you change the amount you invest every month. You have a target amount that you begin with and then you adjust your monthly contribution depending on how the initial investment does. If you plan to invest one hundred dollars a month and the price of shares goes down, reducing your total to ninety dollars, the next month you pay one hundred and ten dollars to complete your total for the two months. You would then adjust the amount you pay down if the price of shares goes up. Generally value averaging is thought to be a consistently better strategy than dollar cost averaging. However, this is only by a couple of percentage points. Dollar cost averaging is certainly simpler, which might be to your advantage if you don't have as much time to watch the price of shares. In either case, it is important to know what the alternatives are and to act accordingly. Just investing isn't good enough anymore. We are going to have to be educated and aware in the future as we invest if we are going to avoid crisis and if we want to continue to grow our wealth. Always consult a financial expert before investing, and especially in such perilious times. Good luck investing!
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