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Automatic investment plans put your saving and investing on cruise control. Once you set the wheels in motion, a specific amount can be deducted from your checking account each month and invested automatically. You can usually get started for $50, as long as you agree to regular electronic investments.
Here are some of the automatic savings plans you can establish:
- Automatic investment plans sponsored by brokerage firms and mutual funds, but watch out for fees
- Payroll deduction investment programs
- Retirement savings plans through your employer
- IRAs where your contribution is deducted monthly from your account.
All of these automatic investment programs can be set up to utilize the dollar-cost averaging strategy.
Dollar-Cost Averaging
Dollar-cost averaging is a strategy that can help you to build wealth. You invest methodically, instead of putting all of your money into an investment at one time. You invest the same amount at regular intervals. Dollar-cost averaging works particularly well when you’re investing in stocks and mutual funds. Each investment buys more shares when prices are low and fewer shares when the price is high.
Let’s say you invest $100 per month in a stock that is currently selling for $20. Your investment buys five shares. If the price of that stock drops to $10, your $100 investment entitles you to ten shares. If the price of the stock escalates to $25, your investment only buys four shares. With dollar-cost averaging, you buy more shares when prices are low and less shares when the price is high.
The key to dollar-cost averaging is investing the same amount each month through good times and bad. The average price you pay per share winds up being lower than if you tried to pick the right moment to invest and guess wrong.
One note of caution, though: if you don't keep an eye on the sales charges or brokerage commissions you pay, dollar-cost averaging can become an expensive strategy. Look for low-cost programs to keep these expenses from taking too much of a bite out of your returns.
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