Carter Terry and Company

Mutual Funds

Dollar cost averaging

Mutual funds pool the money of many investors who share similar objectives, creating diversified portfolios under professional management. A mutual fund may invest its shareholders’ money in stocks, bonds, or both. Some mutual-fund companies provide families of funds, allowing you to switch your money from one fund to another as your investment objectives change.

Many funds allow an initial investment as low as $250-$1,000 and can provide convenient reinvestment of dividends and capital gains. Many also allow you to take advantage of a proven investment discipline called dollar-cost averaging--investing the same number of dollars at regular intervals--through convenient payroll deduction.

We offer a variety of stock, bond, and balanced (stock-and-bond) mutual funds from several companies--including municipal-bond funds designed to yield maximum tax-exempt income. We also offer unit investment trusts (UITs), which provide diversified portfolios of municipal, public debt, and equity securities.

The Power of Dollar Cost Averaging

Ask any astute investor the key to successful investing and the answer will be patience. This is perhaps the most difficult lesson any investor can learn.

Hand-in-hand with patience goes the time-tested discipline of investing for the long term. Money managers will tell you that, in most cases, a long-term approach to investing is a wise choice.

Dollar-cost averaging is an important tool investors can use to bring stability and discipline to an investment portfolio. This method of systematic investing helps minimize risk while making investment dollars work harder.

Let's imagine that you use a periodic investment program in which you select a mutual fund and then buy the same number of shares each quarter, no matter what the price. You buy 100 shares each quarter for four quarters, and sell the whole investment in the fifth quarter (Case A).

Now let's use the same mutual fund, with the same price movement--but instead of buying 100 shares each quarter, let's say you're investing $1,000 each quarter. Again, you sell the whole investment in the fifth quarter (Case B).

Here are the results of the two strategies.

Case A

Month Investment Price Shares Bought Shares Sold Proceeds
March $1,000 $10 100    
June 800 80 100    
September 1000 10 100    
December 1200 12 100    
March   13   40 $5200

Case B

Month Investment Price Shares Bought Shares Sold Proceeds
March $1000 $10 100    
June 1000 8 125    
September 1000 10 100    
December 1000 12 83.33    
March   13   408.33 $5308.33

In both cases, you’ve invested the same total amount of money in the same fund at the same times, at the same prices, and sold at $13 a share.

But by investing the same amount of money each period, you've bought more shares when prices were low, fewer shares when prices were high. So instead of 400 shares for your original investment of $4,000, you bought 408.33 shares. Your average price per share was $9.80 instead of $10. The result? Instead of 30%, you've made 33%. Dollar-cost averaging has put you $108.33 ahead.

Of course, dollar-cost averaging in itself does not ensure a profit. If you sell your shares at less than the average price you paid for them, you'll have a loss. However, dollar-cost averaging does lower the price you have to get to break even.

If you can set aside a specific amount of money periodically, and invest it in a security that should rise in value over time, you're making full use of dollar-cost averaging--an investment discipline that makes sense for intermediate- and long-term investors.