Dollar cost and value averaging strategies

The economy is in pretty serious decline these days. We all know that there are some serious problems with financial institutions around us. We know that they are failing and that investors are pulling out. Banks are having serious problems and are not willing to lend money because they are afraid that they will not be able to be paid back. We can all point fingers at this time but it won't do us too much good. The financial crisis was really a combination of greed and ignorance. It was greed on the part of bank management and it was ingnorance on the part of those who took out ridiculous mortgages. The point is that as consumers and purchasers of loans we need to become better educated and more careful. The crisis simply would not have happened if people had realized what was really going on. So how can we become more educated about something as complicated as the economy. While it is true that the economy is complicated this does not mean that you can't learn enough about it to prevent a major personal economic disaster. One thing that you should know about is investment options. One important form of investment is dollar cost strategy. Another important strategy is the value averaging strategy. It is important for you to basically understand these strategies if you are going to invest in mutual funds, which are very important investments in our economy.

A dollar cost average strategy is a particular way of investing in the same mutual fund over the course of several months. When you use dollar cost averaging you simply invest the same amount in the fund every month without any variation. If the price of shares in the fund goes down, this means that the same amount of money invested at that time will purchase more shares. If the price goes up then the same investment will purchase fewer shares. This is supposedly a technique that results in a general lower cost of the shares on average, assuming that the price of shares goes up and down.

Value averaging is a little different. Like dollar cost averaging it is a method that allows you to invest several times over many months in a single mutual fund. When you value average you change the amount you invest every month. You have a target amount that you begin with and then you adjust your monthly contribution depending on how the initial investment does. If you plan to invest one hundred dollars a month and the price of shares goes down, reducing your total to ninety dollars, the next month you pay one hundred and ten dollars to complete your total for the two months. You would then adjust the amount you pay down if the price of shares goes up.

Generally value averaging is thought to be a consistently better strategy than dollar cost averaging. However, this is only by a couple of percentage points. Dollar cost averaging is certainly simpler, which might be to your advantage if you don't have as much time to watch the price of shares.

In either case, it is important to know what the alternatives are and to act accordingly. Just investing isn't good enough anymore. We are going to have to be educated and aware in the future as we invest if we are going to avoid crisis and if we want to continue to grow our wealth. Always consult a financial expert before investing, and especially in such perilious times. Good luck investing!