Using mutual funds to invest in season and out of season

TAKING the judgment factor away from investment decisions may seem like taking the handlebars off a bicycle, but a lot of people who invest in mutual funds come pretty close to that and make money at it. When the market is up, they invest. When it's down, they invest. When it's so-so, they invest. And they do it all with the same amount of money.

This is not a bunch of financial daredevils, but a fairly conservative group practicing something known as ``dollar-cost averaging,'' or DCA. After they pick a mutual fund (the last time they have to make a judgment call), they make a commitment to themselves to send in equal amounts of money at predetermined intervals. It may be once a month, every three or six months, or once a year.

Now, says John Markese, a vice-president and director of research at the American Association of Individual Investors, many people are practicing dollar-cost averaging without knowing it. If they are participating in employer-sponsored salary reduction plans for retirement, like a 401(k) or a 403(b), and a mutual fund is available for one of their investment options, they are practicing DCA by having a specified amount -- usually a percentage of their salary -- deducted each payday.

To make it work, you have to pick a fund with a good record of long-term growth, says Mr. Markese, who is also a professor of finance at DePaul University. It doesn't matter if the fund has periods when its share price, or net asset value, goes well below average, as long as it maintains an upward direction in the long run. In fact, he says, you want some volatility and dips. By investing the same amount each time, he explains, you buy more shares of the fund when it is down. Then, when the fund moves u p, you have a larger number of these once-cheap shares increasing in value.

``You want a fairly aggressive-type fund that is fully invested'' in stocks, he says. This, he adds, eliminates bond and money market funds, as well as funds that can ``go to cash,'' that is, move all or a great deal of their asets out of stocks and into money market instruments when the market is down. These funds tend to have little volatility and so don't give you an opportunity to buy more bargain-priced shares.

While many investors maintain their dollar-cost averaging for several years or even decades, you don't necessarily have to stick with it that long, Markese says. But you do have to stay through one full business cycle. This means if you start when the economy is at its peak, you should continue through the decline, through the bottom of the recession, through the recovery, and back to the next peak.

``The time when you're most likely to lose your resolve is when the market is at its worst,'' he notes. ``That's the time to hang in there.''

True, such investing is not for everyone. First, you have to be disciplined. If you are not doing this through a payroll-deduction system, you have to force yourself to send in that money at every designated interval, no matter what the market is doing.

Second, many investors prefer to take a more active role in mutual funds. They believe they can do better by closely watching the financial news and finding funds that are doing well right now, or are likely to move up in the near future. They are the sort who like to move their money from one fund to another with a telephone call.

But for those who don't have the time, know-how, or desire to go through this switching process, DCA has proved to be one of the easiest strategies for success with mutual funds.

If you are practicing it through an employer-sponsored retirement saving plan, Markese notes, you may actually be engaged in a slightly improved version of it. Even though a true program of dollar-cost averaging calls for you to invest the same amount every time, your investments through a payroll-deduction plan will change -- presumably upward -- every time your pay changes. If you get a 5 percent raise, then your deposits will go up 5 percent.

The reason this is an improvement over the conventional method of dollar-cost averaging, Markese says, is that as your salary grows, your mutual fund deposit stays proportionally the same. Otherwise, he contends it would eventually be too small in relation to your current salary -- and to your future needs for retirement funds.

Finding the right funds for dollar-cost averaging may be the hardest part of the progam. If you're an income-oriented investor, a recent issue of the United Mutual Fund Selector, a newsletter published in Boston, may have provided a place to start.

The editors looked for funds whose 12-month yield was higher than an ordinary bank savings account (5.5 percent) and whose 12-month performance beat the Dow Jones industrial average (up 24.6 percent through May). They included all open-ended equity funds the newsletter follows, but left out bond and income funds because of their heavy emphasis on fixed-income investments.

Of three dozen funds that met these criteria, five were recommended: Evergreen Total Return, Phoenix Balanced, Prudential-Bache Utility, Sentinel Balanced, and Vanguard Wellington. These funds were said to have good records of strength through various markets, high yields, and long-term growth. The Evergreen and Vanguard funds are no-load; sales charges on the others range from 5 to 8.5 percent.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.

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