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Profitable Investing in a Volatile Market


The more volatile prices become, the more advantage you, as a steady saver, can gain.


A lot of folks get washed out of their stocks when the market starts jumping up and down in nerve-shattering fashion, as has been the case over the past couple of weeks. With the sudden return of 100-point swings in the Dow Jones Industrial Average and similar volatility in other market gauges, you can hardly be blamed for thinking about running to the mattress.

Don't do it. The more volatile prices become, the more advantage you, as a steady saver, can gain. It's true. People assume that big price swings are best for rapid-fire traders who, if they catch the right wave, can score big in just a day or two. The problem is that for each trader who catches the right wave there's another one catching the wrong side. In a volatile but overall flat market, trading is a zero-sum game.

But by sticking to a regimen of investing a set amount at regular intervals, as most folks do with their 401(k) or other automatic-investment accounts, you can be a certain winner.

Consider a stock or mutual fund in which you invest $100 a month at a starting price of $20 a share. After one month, the price is $25, a month after that $10, then $30, $15 and, finally, right back at $20, where it stays for a month. The price swings may give you the jitters and seem especially intolerable given that after six months, in this example, you have ended up right where you started: $20.

Yet because you invested $100 each month, and thus were accumulating shares while the price was down, you would have ended up with 34 shares at an average price of just $17.65, and would be up by the annual equivalent of 27%. That's the magic of steady investing, also known as dollar-cost averaging. You automatically buy more shares when prices are low and fewer when they are high, driving down your average cost per share. The bigger the price swings the better.

So keep that in mind as stocks zig and zag in a fashion that may make you want to lose your lunch. That upset in your stomach is actually a good thing-if you can stick to your long-term plan.


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No positions in stocks mentioned.

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