Managing Money: Here is an investment strategy for uncertain times

While there are many invest ment strategies you can use to help manage your portfolio through fluctuations in the market, dollar cost averaging can be one of the most effective.

When you use dollar cost averaging, you purchase the same dollar amount of shares at regular intervals, regardless of the price of the shares. Here's an example of how the strategy works:

Say you choose to invest $100 a month in XYZ company stock.

Every month, regardless of the price of XYZ stock, you purchase $100 worth.

Let's say that in January, shares of XYZ cost $5 per share. So, using the money set aside ($100), you would acquire 20 shares. In February, the cost for the same investment decreases to $2.50 per share, so you would be able to purchase 40 shares that month with your $100.

In March and April, the shares are selling at $4 per share, so you can buy 25 shares at the end of each of those months. In May, you again are able to obtain 20 shares at $5, while in June the stock closes at $10, enabling you to buy 10 shares. As a result, over the six- month period, you spent $600 to buy a total of 140 shares of XYZ.

Looking back, if you had invested the same $600 as a lump sum in January, you would have acquired only 120 shares of XYZ ($600 multiplied by $5 equals 120). Through dollar cost averaging, however, not only were you able to acquire 20 additional shares, but the average price you paid per share declined from $5 to about $4.29.

In hindsight, you may be thinking that you would have been better off investing the lump sum in February instead of June. However, we all know we can't predict the market, and while the past few years have shown declines in the market, the next few years may be full of increasing stock valuations.

Dollar cost averaging is designed to help you buy more shares when the price is low and fewer shares when the price is high, with an overall goal of lowering your cost per share. As you can see, by investing a predetermined amount of money every month, or even on a quarterly basis, you don't have to be as concerned about the actual price of the investment and whether its value is about to rise or fall.

Dollar cost averaging can help make you a disciplined investor, by requiring you to commit to investing a regular fixed amount of money. This will help you remember to make those investments, and spare you the anguish of having to come up with a larger amount of money all at once. And if you choose to invest on the same day each month, you will take the guesswork out of trying to time the market.

Keep in mind, this investment strategy doesn't guarantee profit or protect against loss in declining markets, and it is most effective when you take a long- term approach to investing. Because dollar cost averaging requires continuous investment in securities regardless of fluctuating prices, you should con sider your financial ability to continue purchases through periods of low price levels.

Terrence J. McCreanor is senior vice president of investments at A.G. Edwards & Sons Inc., member SIPC. Call McCreanor at 642-6000 or write to him in care of A.G. Edwards, 979 N. Collier Blvd., Marco Island, FL 34145. The above example is for illustrative purposes only and does not reflect the performance of any specific investment. Additional costs involved with investing were not included in the example. Past performance does not guarantee future results.