There's a better way to re-enter the market

If one thing is certain about the economic environment during the past few years, it's that markets fluctuate. Even experienced investors often find it impossible to accurately time a market - to "buy low and sell high." In spite of this, however, many investors may be looking for a way to get back into the markets: to try and "time" their re-entry. A better strategy to consider may be dollar-cost averaging, which offers the discipline of a systematic investing schedule while potentially decreasing the average cost per share of the securities in which you're investing.

DOLLAR-COST AVERAGING DEFINED

Dollar-cost averaging is a long-term investment strategy designed to avoid the pitfalls of timing the market by investing equal amounts of money at regular intervals (monthly, quarterly and so on) over a long period of time. The idea behind dollar-cost averaging is that an investor buys more shares when prices are lower, and fewer shares when prices are higher. Although the strategy doesn't assure a profit or protect against a loss, over time the average cost per share an investor pays through dollar-cost averaging is typically lower than the average share price over the same period.

For example, a hypothetical investor has decided to invest $100 per month in the shares of Company X over the course of five months for a total investment of $500. Each month, he buys shares with his $100 investment. In January, he buys 10 shares at $10 each. In February he buys 20 shares at $5 each. In March he buys 50 shares at $2 each. In April he buys 25 shares at $4 each and in May he buys 12.5 shares at $8 each. At the end of the five-month period, he has invested $500 and purchased a total of 117.5 shares. The average share price during this time was $5.80 per share; however, because of his fixed investment schedule, our investor only paid an average cost per share of $4.26.

The key to dollar-cost averaging is to stick with it for the long term, through periods of rising and falling markets. (Before using this strategy, which involves investing in securities continuously regardless of fluctuating prices, investors should consider their financial ability to continue making purchases through periods of low price levels.)

THE POWER OF COMPOUNDING

In addition to the advantages of dollar cost averaging, systematic investing may also benefit you through the power of compounding. To illustrate, consider an investor from December 1984 through December 2009 using two different investment strategies. One strategy featured regular investments of $300 per month; the other made a single investment of $3,600 at the end of each year. Both portfolios started with $10,000 and both were invested 55 percent in the S&P 500 Index and 45 percent in the BC Government/Credit Index, a well-known fixed-income benchmark.

Ultimately, regular monthly investments of $300 would have grown - or compounded - faster than one annual year-end investment. The annual investment strategy would have grown to $355,025 and the monthly investment strategy would have grown to $366,187, to provide more than $11,000 in additional asset growth over the 25-year period.

CONCLUSION

Dollar-cost averaging is one of the best ways to invest regularly, since you are investing a fixed amount on a fixed schedule regardless of how the markets perform. Investing regularly can also have intrinsic benefits: It encourages discipline and may also help ease the anxiety of daily market fluctuations. Your financial consultant should offer an investment program that can take advantage of systematic investing schedules and dollar-cost averaging on both an explicit and implicit basis.

Happy Nevada Day Weekend.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.