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Monday, April 7, 2008

Finances: Dollar-Cost Averaging Bad?


So, I've been reading Get Rich Slowly lately.  You can find the link to it in my list of blogs I read on the right side, if you are interested.  Through them, I came across this article about Dollar-Cost Averaging.  I found it pretty interesting.  Dollar-Cost Averaging has been preached to me over time by just about anyone that claims to know anything about investing.  It was interesting to read something that counters that logic. 

You see, when I sold my house, I took the money and thought about it for a couple months.  Then, I had some time and I had done some stock research and I took it and invested a large chunk (about 60%) in mutual funds that I really liked.  Then, another chunk (10%) was put into common stocks, with the thought that I could start small and start playing with the market and seeing how I did.  Still, that 10% in stock was assumed to be a long-term investment.  I'm no day-trader and I don't have time to sit on the market all day.  The other 30% went into my savings account - part of it meant to be a down payment on a new car, which I intended to buy within the next year (still thinking about that, as you know), and the rest being a rainy-day fund of readily available cash if I needed it.  I am a single lady and that makes me feel more secure.  I've since put any additional savings (whenever that savings account gets too far over 30% of my total savings) into the stock market, so my stock portfolio is growing.

Still, I've been annoyed with myself for choosing lump-sum over dollar-cost averaging.  Honestly, I chose lump-sum partially out of just forgetting to dollar-cost average and getting excited about investing.  I also wanted to reduce the amount of transaction fees that I paid.  The more the stock market falls, the more I've been kicking myself for dumping everything into it at once.  So, I'm pretty happy to see that I may have made a good decision after all.  Sure, I'm still down overall, but not down as much as the market is.  And, I still have some money safely in my savings account.

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