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WHEN GOOD INVESTING GOES BAD

145

Dollar-Cost Averaging

Date

Amount Invested

Market Price Paid

Number of Shares Purchased

Quarter 2000

$1000

$23.25/share

43.01

Quarter 2001

$1000

$22.75/share

43.95

Quarter 2001

$1000

$28.75/share

34.78

Quarter 2001

$1000

$30/share

33.33

Quarter 2001

$1000

$26.50/share

37.74

Quarter 2002

$1000

$22.50/share

44.44

Quarter 2002

$1000

$16/share

62.5

4 1 2 3 4 1 2 th st nd rd th st nd

$7000

Total amount invested over the seven quarters Total number of shares purchased Average market price of shares Average cost ($7000 299.75)

= $7000 = 299.75 = $24.25 = $23.35 per share

299.75 shares

Figure 8.1: The above illustrates the advantage of dollar-cost averaging. By investing the same amount of money over a period of time, the investor will realize a different number of shares purchased each time at a different price. However, over time the investor’s average cost per share decreases. There is also a difference between the average cost per share and the average market price, which adds to the investor’s benefit. These figures are for illustration purposes only and aren’t meant to indicate any type of investment performance. Dollar-cost averaging doesn’t assure a profit against losses in a declining market. Investors should consider their ability to continue investing through periods of low market prices.

longer amount of time. Either way, the worst situation is to not be invested at all.

SELLING SHORT

When you purchase stocks, mutual funds, bonds, or another invest- ment equity, you are making a long transaction. That is, you pay for securities that you anticipate, or hope, will increase in value, thus increasing your portfolio value. However, selling short is the oppo- site and is done in anticipation that the security will decline in value, which in return would earn you a profit. There are a number of risks associated with selling stocks short, just as there are with purchasing securities on margin. The difference in risk, though, between the two concepts could be described like this. If the market declines and you

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