Dollar-Cost Averaging for Mutual Funds

The process of dollar-cost averaging traditionally works very well with mutual funds. One of the best ways that an investor can create wealth is to implement a dollar-cost averaging strategy in his or her portfolio. Here are the basics of dollar-cost averaging for mutual funds.

What Is Dollar-Cost Averaging?

In order to understand how this process works with mutual funds, you first need to understand what dollar-cost averaging is. Dollar-cost averaging is the act of investing a fixed amount of money on a regular interval schedule. When you do this regularly, it will level out the cost of the shares that you buy. When the price of the security is low, you will be able to buy more shares. When the price of the security is high, you will buy fewer shares. However, it will average out over the long term. This eliminates worrying about the ups and downs of the market. You simply buy however many shares you can buy with your fixed amount of money, and your portfolio continues to grow.

Mutual Fund Advantages

Utilizing a dollar-cost averaging strategy works very well with mutual funds. In fact, using a mutual fund for this strategy will work better than if you purchase individual stocks. When you buy shares of a no-load mutual fund, the expense ratio of the fund will be the only transaction cost that you have to worry about. This will be based on a percentage of the total amount of money that you invest. With stocks, you will have a fixed commission on each transaction, which could amount to a much larger percentage of money being used. The less you can spend on transaction costs, the more you will have to actually invest in the market. Since you are going to be making a large amount of individual transactions, you need to lower the per-transaction cost. Over the years, this will add up to a substantial difference.

Diversification

Another advantage of using dollar-cost averaging with mutual funds is the diversification that it provides. Instead of putting all of your investment dollars into one particular stock, you are diversifying your funds over an entire portfolio. The fund is made up of hundreds or potentially thousands of different stocks, bonds, CDs and other securities. Therefore, the bankruptcy or under-performance of one particular company is not going to adversely affect your investments that much. This results in a much safer investment style that will ultimately grow your portfolio better.

Investment Considerations

This is one of the best investment strategies that you could implement. Open an account with a good financial broker and do some research to find a good mutual fund. Make sure that you find one that has no load fees so that you can invest as often as possible with no problems. From there, simply implement a regular investment plan and make it automatic. Before long, your portfolio should grow considerably.

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