When you invest in the stock market, you obviously want to put your money when the prices are low and then take the money out when the prices are high. This way you will get a lot of profit for your investment. But timing the market like that is difficult, not only for laymen but also for professional investor. What often happen is the exact opposite: people buy the investment products while the price is high and sell them when the price is low (since they become panic because of the low price). That way many people actually invest their money for loss.
This, of course, also applies to mutual fund investment, more specifically to the mutual funds that invest in the stock market (this is the type of mutual fund that becomes the focus of this article). It’s hard to time the market and many people actually buy and sell at the wrong time.
Fortunately, there is a simple strategy to overcome this situation. The strategy is dollar cost averaging where you invest a fixed amount of money periodically for certain period of time. For example, you may want to invest $100 a month every month for one year. No matter what the price is, you keep investing the money month by month. That’s a simple strategy, isn’t it?
Though it’s simple, it works well for many people. Just think about it. With this strategy, you will buy more mutual fund units when the price is low and less units when the price is high. So when the price increases, you get relatively more profit and when the price decreases you suffer relatively smaller loss.
Many banks now offer the ability to execute dollar cost averaging. You can automatically invest certain amount of time periodically in your investment instrument of choice. Take advantage of such an arrangement if you had one in your bank.