V.7:5 (154-156): Averaging systems by Charles Idol

V.7:5 (154-156): Averaging systems by Charles Idol
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Averaging systems by Charles Idol

Everyone knows the secret of successful investing: buy low and sell high. Unfortunately, that rule requires accurate market predictions. If clouds obscure your crystal ball, it would be to your advantage to consider the merits of the averaging systems.

Dollar averaging has been advocated for a long time as a conservative, reasonably successful system which takes some advantage of market cycles, surpasses the "buy it and forget it" syndrome and requires almost no thought on the part of the investor. Value averaging requires a little more work, participates more deeply in the market cycle and appears to outperform dollar averaging.

The dollar averaging system requires only that you choose a security in which you wish to invest a fixed amount of money at regular intervals, usually every month. Usually, dividends or distributions are re-invested. Very simple in application, the method lends itself to a budget for investment and takes advantage of market cycles because you purchase more shares per unit time in the low portions of the cycle and fewer in the high portions. However, you need cyclical market behavior and you must participate over at least one cycle.

Value averaging requires that you choose a security in which you wish to have your equity increase by a fixed amount at regular intervals, again usually every month. To implement this method, you begin by investing the budgeted amount. At the start of the next month, you multiply the current share value by the number of shares you hold to see how much you must invest to increase your equity by the amount of your plan.

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