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Funds 106: Methods for Investing in Mutual Funds

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1.
If a mutual fund's value increases every month for a 12-month period, which of the following investors most likely comes out ahead?
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The lump-sum investor. With a lump-sum investment you would have purchased the most shares at the lowest net asset value--right at the beginning of the period.
2.
When they both have the same amount of money to invest, a lump-sum investor will always outperform a dollar cost averager because of the fact that he started earlier and could therefore take advantage of time.
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False. In cases where the price of the investment fluctuates up and down, the averager can actually outperform the lump-sum investor because he is sometimes buying more shares as the price drops.
3.
Dollar-cost averaging means _______.
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Investing a set amount of money on a regular basis. It's an effective method of investing because it buys more shares when the price declines and fewer when the price rises.
4.
Market timing means investing your money only when you sense that the time is right.
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True. Market timing is difficult to do.
5.
If a stock mutual fund was very volatile over a 12-month period, which of the following investors most likely comes out ahead?
Choose wisely. There is only one correct answer.
The dollar-cost-averaging investor. The dollar-cost-averaging investor has probably accumulated more shares than either the timer or the lump-sum investor and had some uninvested cash on hand when the lump-sum investor was losing money.