From October 28, 2009

One of the more difficult aspects of implementing an investment strategy is deciding when to invest. Fear of investing at a market high can keep investors waiting on the sidelines for some indication that it is a good time to invest. Unfortunately, the market never sends those messages.

Adopting a systematic investment approach takes away the need to make timing decisions. Once the plan is in place, you just follow it and continue investing on a periodic basis. The most common systematic investing approach is dollar cost averaging.

Dollar cost averaging involves investing a certain sum of money in the same investment on a periodic basis. For instance, instead of investing $48,000 in a particular stock immediately, you may decide to purchase $4,000 at the beginning of the next 12 months.

Since you invest a fixed amount of money, you purchase more shares when prices are lower and fewer shares when prices are higher. The average cost per share using dollar cost averaging is usually lower than the average market price per share over a given time period. However, if your investment increases in value over the investment period, you will pay more than by purchasing it all on the first day.

You may already use a dollar cost averaging program without realizing it --  participating in a 401(k) plan, reinvesting dividends in additional shares, or automatically transferring funds from a checking account to an investment account are all forms of dollar cost averaging.

Dollar cost averaging requires the discipline to invest consistently, regardless of market fluctuations. It is a good strategy for developing the habit of regularly setting aside money for investment. However, it does not ensure a profit or protect against losses. Before implementing a dollar cost averaging strategy, you should consider your financial ability to continue purchases through periods of low price levels.

Dollar cost averaging is a defensive strategy that can help protect you from making a major investment when prices are at a high, especially during volatile markets. This strategy may be well suited for investors who have uniform amounts of money to invest on a periodic basis, who follow a buy-and-hold strategy, or who do not want to attempt to forecast market movements.