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Funds 106: Methods for Investing in Mutual Funds

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1.
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.
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.
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.
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.
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.