Column: Falling fund prices good for some
If you own mutual funds, you may be paying close attention to which way the share price moves. And you’re probably inclined to cheer when the price goes up. Actually, although it may be somewhat counter intuitive, you should hope the share price goes down sometimes, that is if you plan on buying more shares. Why should I want the share price to drop,” you ask yourself? Won’t I be losing money?
I wish it were that straightforward. To understand why you should hope for falling share prices, you need to consider your behavior as a consumer. Did you hesitate to buy a PC because you knew the price would fall? If so, you were smart. Personal computer prices have fallen markedly. How about a new car? Did you wait until the new model year came out so you could buy last year’s model at a discount? If so, congratulations. That was another smart move.
As a rational consumer, you are always hoping for the price to go down before you buy. Why wouldn’t you? You work hard for your money, and you want it to go as far as possible. But many people don’t realize that their purchasing behavior also should extend to their investments. If you are investing in stock mutual funds for the long term, and you should because they are not suitable short term investments, then your situation is clear. Every time you share price rises, it costs you more to invest. When it falls, it costs you less.
You can start putting this concept to work immediately. The next time you get your mutual fund statement, for example, look for the column that gives the “share balance.” Unless you have sold shares, this figure will always be increasing. And that is exactly what you want; more share, not higher share price.
In fact, if you follow an investment strategy called dollar cost averaging, you may be able to achieve a lower average share price over time. Here’s how it works. You invest the same amount of money every month into your mutual fund at the same time interval. When the price of your fund is down, you will automatically buy more shares; when the price is up, you will buy less.
Is there ever a time when you should want the share price to go up? Certainly, just before you sell your shares. But if you are following a long-term investment strategy, you are buying far more mutual fund shares than selling them, I hope. If your fund’s investment objectives and management style still fit your individual needs and goals, and if you feel confident in the fund’s future, then you may want to hold onto it for many years.
If you view mutual funds as a method of investing for the long term, then share prices have little to do with your plans. Remember the best time to invest is when you have funds available. However, you should not fear, but welcome those price dips as an opportunity to buy funds “on sale.” Dollar cost averaging is one of my favorite long-term investment strategies, so if you would like more information, please call at 822-6070.
Carol Perry, a Northern Nevada resident since 1983, represents the firm of Edward Jones Investments in Carson City.