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Funds 106: Methods for Investing in Mutual Funds

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1.
If a stock mutual fund was very volatile over a 12-month period, which of the following investors most likely comes out ahead?
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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.
2.
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.
3.
Why might dollar-cost averaging be useful if you are trying to get into a mutual fund with a $5,000 minimum initial investment and you don't have anything near that amount?
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The fund might waive its minimum initial investment requirement if you agree to set up an automatic investment plan and invest a little each month or quarter. Many funds will give you this option.
4.
To successfully outperform the market by timing, Morningstar found that an investor's calls must be right _______.
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Two thirds of the time. Because stocks go up more often than they go down and because of the effects of compounding, market-timers can't just get their calls right half the time and outperform. They must be right two thirds of the time. That's a lot.
5.
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.