mutual funds
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cost averaging

To cost average means you are adding funds on a regular basis, regardless of what the markets might be doing.

Most people in their younger years do not have much choice of this matter, as they rarely have large sums of money to invest in one go, but have to take a part of their monthly paycheck to save and accumulate. (for a simulation of DCA vs Lump Sum see here:)

The effect of averaging can be very healthy for your financial health, as it makes you less susceptible to the whims of the markets, as you don’t buy into the market in one go, basically making a huge timing bet, which has been shown as being quite impossible.
Of course it would be nice to enter the market just as it is bound start for the bull of the century, but chances are you might pick the wrong moment, and enter just before the bear of the century.

Cost Averaging SPI Jan. 1996 to Sep- 2003 blue: Swiss Performance Index; green: averaged Price



The graph above shows the effect of cost averaging for a monthly investment in the Swiss Performance Index for a total of 93 months.

In certain books and on the Internet cost averaging is frequently called DCA, from Dollar Cost Averaging, showing where the idea might have come from.

Taken one step further cost averaging becomes value averaging, which is a bit messier to execute, and really only for those who derive some considerable enjoyment out of financial matters and playing around with Excel sheets.

For those who wish to explore the subject further, Peter Ponzo (alias Gummy) has written some very nice spread sheets that can be found here:

In case Gummy's site is not online see also here: