The Third Rule of Successful Mutual Fund Investing:
INVEST IN YOUR FUNDS REGULARLY, THROUGH ALL MARKET UPS AND DOWNS
Since it’s impossible to predict the ups and downs of the stock market, put this cyclicality to work for you with rule No. 3 of mutual fund investing: “Invest in your funds regularly, through all market ups and downs” — a program of regular investment into the market, no matter whether we’re in a bull or bear market, in winter or summer, or on rainy or sunny days. Investing a fixed amount each month into the purchase of fund shares actually confers an enormous benefit of forcing you to buy more shares when prices are low and fewer shares when prices are high.
In the investing world, this is known as dollar-cost averaging, and it’s no different from stocking up on staples that you use regularly in your household like toilet paper or laundry detergent when they’re on sale at the grocery store. You use these kinds of items each month, but if prices are high you may be apt to buy only what you need. If there’s a sale, you may buy more of these goods.
401(k) plans and their cousins, 403(b) and 457 accounts, are great mechanisms to take advantage of dollar-cost averaging. With each paycheck, a fixed amount of money is withheld and invested for you, giving you little (if any) control over the prices that you pay to purchase the fund shares you’ve selected.
In bull markets (when stock and fund prices are high), your regular monthly investments have less purchasing ability. That’s great, though, because it means that you buy fewer of the higher-priced shares.
On the other hand, in bear markets (when stock and fund prices are low), your regular monthly investments buy a higher number of shares, just as you would if a sale sticker was stuck on them.
Next blog will cover rule #4: “Take advantage of tax-advantaged accounts whenever possible.”
You can learn more in the How to Use the Mutual Fund Informer Guide or in the educational articles included in each issue of the Mutual Fund Informer, a new monthly mutual fund newsletter publication from ICLUBcentral that presents profiles of high-quality mutual funds with superior long-term track records. Get profiles of high-quality mutual funds at lowest subscriber rate plus sample a free issue now.