When you buy
mutual fund
shares through an employer-sponsored plan, you're using an investment technique known as
dollar cost averaging.
That means you're investing the same amount of money — in this case the percentage of your salary that you're deferring into the plan — into the same funds on a regular schedule.
Dollar cost averaging has a double advantage. Not only are you adding to your account on a regular basis, which has the potential to boost its value. But when you continue to buy as the price of the mutual fund goes up and down to reflect the changing market value of its
underlying investments,
your average cost per share over time is less than the average price per share, since you buy more shares when the cost is lower and fewer shares when the price is higher.
You can use the same technique for buying mutual funds in taxable accounts as well, with the same advantages. It makes investing easy, as you may be able to authorize a direct transfer from your paycheck or bank account to buy the shares. But you must stick with your purchasing plan when the market drops, or you'll end up paying only the highest prices.
Remember, though, that dollar cost averaging, despite its advantages, doesn't guarantee a profit or protect you against losses in a falling market.
Dollar cost averaging has a double advantage. Not only are you adding to your account on a regular basis, which has the potential to boost its value. But when you continue to buy as the price of the mutual fund goes up and down to reflect the changing market value of its
Marc Lackritz