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Funds 106: Methods for Investing in Mutual Funds

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1.
Timing the market incorrectly can not only make you miss out on performance, but it can augment it thanks to _______.
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Compounding. Because compounding earns you returns on previous returns, a missed market timing can, in a sense, cost you even more.
2.
Which of the following statements is false?
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Dollar-cost averaging always leads to better returns than lump-sum investing. In a rising market, a lump-sum investor will earn more than someone who is dollar-cost averaging into a fund will. However, dollar-cost averaging limits risk, instills discipline, and often allows investors to get into high-minimum funds for less.
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.
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.
5.
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.