Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, May 15, 1995 TAG: 9505170012
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Medium
You are dollar cost averaging.
So established is this rule that many people follow the principle even when they have a large lump sum for investment.
Now, however, some contrarians are suggesting that, in some circumstances at least, it's better for some people with a lump sum to forget the old rules and invest all at once.
John C. Parrott II, a certified financial planner with Wheat First Butcher Singer, is a strong advocate for dollar cost averaging. Without it, he said, you will wind up paying top dollar for a stock mutual fund.
Under this concept, you invest money regularly no matter what happens in the market. If the market is down, you garner more shares of the stock or stock fund for the same amount of dollars. When the market rises, your extra shares are worth more money.
Over the long term, this theory says, you will own more shares purchased at a lower price than you would otherwise.
Even if you have a lump sum, Parrott said, you would spend a portion now on the investment, then invest other portions later. In the long view, Parrott said, you will have fewer shares at the highest price and more shares at the lowest price.
One portion of the money is working for you in the stock market now, he explained, but you invest a share of your money every month or every quarter until all of it is in place. If you are facing an expensive market like the one we're in now, you hope that prices will be cheaper later.
"It saves you from undesirable risk in a high market," Parrott said. Dollar cost averaging, he said, is the best way to go for a conservative investment strategy. He recommends routine periodic investments to all of his clients who are putting their money into mutual funds.
Some clients, he said, have a short-term strategy, trying to time the market and trading for gains. Dollar cost averaging is not for them, Parrott said, because it is geared toward long-term holders of a growth fund.
"It's conservative but still most sensible," Parrott said.
Robert Kulp, manager of the Roanoke office of A.G. Edwards & Sons, said any market is favorable for dollar cost averaging, which is merely "consistent investment through several market cycles."
Anyone who invests regularly in a mutual fund or who reinvests stock dividends is taking part in this strategy, he pointed out.
The system should be used about five years, he said, to hit both highs and lows in the market.
"It takes the guess work out of" mutual fund and stock investing, Kulp said.
But Lindsey Quesinberry, a vice president at J.C. Bradford & Co., said his recent research and experiences have convinced him that "dollar cost averaging is not necessarily the best thing to do" if you have a lump sum on hand.
He called the system of dollar cost averaging "the axiom of financial management planning" for anyone with a large amount of money, such as from a gift or inheritance.
Yet he told of a client with $60,000 to invest. She was "skittish" about the stock market even though she knew she should place her money there for growth, so Quesinberry suggested dividing the money into quarters and investing quarterly over a year's time. This is what he called the "dogma" of dollar cost averaging.
Now, however, the market has risen so much that her subsequent investments must be for fewer shares of stock than she could have obtained originally, Quesinberry said.
In his judgment, he said, investors with a lump sum should ask about the price-earnings ratio of the market. Using a base of 20, he would subtract the inflation rate, which is currently about 3 percent.
In today's market, therefore, he would dollar cost average if the price-earnings ratio is above 17. If the ratio is below 17, he said, he would be inclined to invest the money in stocks as a lump sum.
He agreed that a primary advantage of dollar cost averaging is that "it takes the guess work and emotion out of it." People should want to be in the market because history teaches that's the fastest path to growth, Quesinberry said, but anyone who feels uncomfortable there should dollar cost average over time. Anyone with "moxie" about the stock market, on the other hand, might want to invest the lump sum, he added.
If you have no lump sum, he pointed out, you have no choice but to dollar cost average over time.
Don't try to save up and invest a lump sum at a single time, Quesinberry advised. Invest a little in a stock mutual fund each month.
Don't be concerned about the economic news of the day or the condition of the market because "there's always a reason not to invest." Quesinberry said people who invest regularly over a period of time should see their money grow in the long run.
by CNB