The Ten Percent Solution

 

body's ever called mutual funds an exciting way to invest your money."

"That seems like a lot of problems for what you termed our 'best alternative,'" I pointed out.

"It may seem that way, Dave, but when you examine it closely, it isn't that way at all. I'll prove it, one 'problem' at a time.

"First, market fluctuations. Like a roller coaster, they're fun on the way up and scary on the way down. But, thanks to the power of dollar cost averaging, even downside fluctuations can work to your advantage.

"Dollar cost averaging is as close to infallible investing as you can get. It genuinely slants the odds in an investor's favor, yet I've read all kinds of financial planning books that haven't even mentioned it. Most people haven't even heard of it."

"I haven't," Cathy admitted. "Is it hard to do?"

"It's as easy as pie," Roy assured her. "The technical definition is 'A system of buying common stocks or mutual fund shares at regular intervals with a fixed dollar amount.' Whoop-de-do, you say?

"Let's see how something that sounds so theoretical can easily produce fantastic results.

"Tom, say you decide to save one hundred dollars a month and invest it in fund XYZ. The month you start your program, XYZ is trading at ten dollars a share so, obviously, you buy ten shares. The second month XYZ has dropped by fifty percent, all the way to five dollars . . . not good. Your hundred dollars now buys you twenty shares. In month three, the fund has rebounded somewhat and now trades at seven dollars and fifty cents, still well under your original purchase price. You buy thirteen and a third shares.