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Why dollar-cost average?

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Why dollar-cost average?

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Investing in dribs and drabs may not be the path to greater return, but we still think dollar-cost averaging, or investing a set amount on a regular basis, is a great method of investing. Incidentally, if you contribute to a 401(k) plan at work, you’re already investing this way. Our argument for dollar-cost averaging has a couple of dimensions. First, dollar-cost averaging can reduce risk. If your mutual fund declines in value, the worth of your investment is less, even though you still own the same number of shares. In the same way that dollar-cost averaging will net you more shares in a declining market, it can curtail your losses as the fund goes down. The chart below illustrates this point. Fund value decreasesMonthYour investmentYour cousin’s investment 1 5,556 shares at $1.80 each 1,111 shares at $1.80 each 2 * 1,250 shares at $1.60 each 3 * 1,379 shares at $1.45 each 4 * 1,538 shares at $1.30 each 5 * 1,667 shares at $1.20 each Total shares 5,556 6,945 Ending value $10,556 $8,3

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