One way to make sure you do not buy at the top of the market is to use
a strategy called "dollar cost averaging." This involves making
equal dollar purchases of a mutual fund on a regular basis. By investing
a set amount periodically, you will buy fewer shares when prices are high
and more shares when prices are low. The net result is that your average
cost ends up being below the average price for the investment period.
Many mutual funds have even established programs where they will electronically
transfer money from your checking or savings account on a regular basis
to facilitate this strategy of dollar cost averaging.
Using the dollar cost averaging strategy to buy mutual funds can take
a little longer to get fully invested. If the market goes up continually,
you will miss some appreciation. However, markets seldom go straight up
or straight down. Using dollar cost averaging prevents you from investing
all your funds at the top of the market.
Here is an example to demonstrate how this strategy works. Let us assume
you have $10,000 you want to invest in fund XYZ. Using dollar cost averaging
over a 10-month period would result in the following: