Strategy to buy mutual funds
Marlon Jerez/ Consulting in Economics and Finance
The best strategy to invest in mutual funds or any other investment is
“buy cheap and sell expensive”. This is the way to make a lot of money
buying shares when they are close to their lows and sell them when they
are at their highs.
This looks simple, but to implement this strategy is not easy; it requires
a continuous follow-up on market prices to know the moment when shares are
near to their lows or highs. Not always will you be able to buy all your
shares at the lowest possible price, but there is a simple strategy which
reduces the medium price you pay over time.
The strategy is known as “dollar cost averaging”. Basically, it consists
in investing the same amount of money in the fund regularly and with
determined time frame (monthly, bimonthly, etc.).
First, you have to choose the most convenient interval, which you can
afford. Your dollars can buy relatively less shares when the price is high
and more when the price is low. The strategy “dollar cost averaging”
doesn’t guarantee gains, but it increases the probability that the medium
price you pay for your fund is lower than the average market price.
Let’s analyze an example: You are investing $200 in a mutual fund every 3
month and the price is $50 per share. When the price goes down, it is $25
per share. During the first trimester, $200 can buy 8 shares. During the
second trimester, the price doesn’t recover and is still at $25. You can
buy 8 shares more. At the end of the year the price goes back to $50 and
you buy 4 more shares.
Here is what happened:
Invested Price Shares
$200 $50 4
$200 $25 8
$200 $25 8
$200 $50 4
$800 $150 24
You invested $800 during the first year and bought 24 shares of the fund;
As the market price is $50 at the moment, your shares are worth $1,200 or
$400 more than the price you paid for them. To find out the medium cost
you have to divide the money you paid by the number of shares you are
holding. The medium cost was thus $33 ($800/24).
Well, you might think that if the market price falls drastically in 1
year, you should sell your shares. The response is: “Don’t do this.”
Mutual fund investing is always with a long-term perspective and you have
to stick to your mutual fund especially in bad times, which might occur
The strategy must be to continue to buy every 3 months the same amount of
money. This is the most difficult part of the strategy “dollar cost
averaging”, but the most important as well. On the long run, you can
obtain your shares at a lower medium price when the market is depressed.
"You are free to choose, but the choices
you make today will determine what you will have, be, and do in the
future." - Zig Ziglar