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Dollar Cost Or Lump Sum?

Dollar Cost Or Lump Sum?

So 2008 wasn't the best year for investing. I get it. However, economists and market-watchers are all optimistic for 2009. With that in mind, let's take a look at some investment strategies and when the best time to use them would be.

Dollar Cost Averaging
This refers to making regular investment purchases are regular intervals. In doing so, it averages out the cost of the investment by buying shares at different prices over time. This particular method is good in a falling market (bear market) because as prices go down, your money will buy more shares. This strategy also reduces the risk of making a large sum investment only to watch the market fall directly after.

Lump Sum Purchase

This strategy refers to taking a chunk of cash and dropping it into a particular investment. Some will save their contributions until they have a larger sum while others may use a bonus from work. In either case, the sum of money is put into a specific investment vehicle upfront rather than over time. This strategy works well in a rising market (bull market) because as a certain stock or fund is doing particularly well, your money takes full advantage of rising prices.

Obviously it's hard to time how things will turn out in the market, so trying to time it is pretty much a waste of your time. But, something else these two strategies can help you discover is the type of investor you are. For those who are more conservative, a dollar cost averaging strategy may be better despite the market simply because you have control over the amount of money going into the market. For the risk-takers out there, a lump sum purchase may be better because you want to take full advantage
rising prices when they happen.

In either case, be sure you talk to you investment adviser and discuss which option works best for you. Have you considered these option in your 2009 investment strategies? Which do you find most beneficial and why?

—Kristy Young

Posted: 1/2/09
LauraLee311

I wish I had a lump sum to invest! Right now the only investing I do is contributing to my 401(k) each paycheck.