Stanley - Allocation averaging spells investment success

With all due apologies to Noah Webster, recent financial market developments have shown that you can't spell investment without "R-I-S-K." But experience suggests that simply by concentrating on two A's -- Allocation and Averaging -- personal investors can help to manage their investment risk. Time has shown that asset allocation and dollar cost averaging can be integral elements in a long-term investment strategy.

Monitoring the mix

Both allocation and averaging are somewhat rigorous approaches that at times require a strong stomach. For example, once you've decided on a suitable asset allocation, you and your financial professional will need to watch your portfolio results closely in order to keep the right mix. You're likely to face some pretty tough decisions.

Say you've decided on the following allocation for your portfolio: 60 percent stocks/30 percent bonds/10 percent money market instruments. But the stock portion's growth quickly outpaces the increase in value of your bonds. Now you've got a dilemma if you stick to the plan -- should you sell off a portion of the successful stock segment in order to buy more of the bonds and money markets, which aren't doing as well?

That kind of question can give even disciplined and experienced investors a quick dose of indigestion. Complicating matters, you also have to evaluate the tax and transaction costs of buying and selling, and you need to consider allocation changes whenever your personal circumstances change.

You might be able to make your life somewhat easier, and still benefit from the time-tested advantages of asset allocation by buying mutual funds that practice allocation strategies similar to yours. Even so, that still won't excuse you (and/or your financial professional) from regularly monitoring your portfolio if you intend to maintain a truly diversified and appropriately balanced portfolio.

Dollar cost averaging

This old maxim states a basic truth for those looking to set up a portfolio for the long-term: the sooner you can begin a periodic investment program, the better. And many financial professionals favor dollar cost averaging -- the disciplined practice of making regular, periodic investment purchases with the same dollar amount each time you buy. In that way, you'll be buying more shares when the price is low, and fewer when it's high.

The inherent discipline of such an approach is generally regarded as far sounder than trying to time your purchases to market developments. Not only is that difficult to do, the hesitancy that may result could cost you some excellent opportunities as you sit on the sidelines.

Dollar cost averaging, over time, may allow you to achieve a lower average cost per share versus the share price of your investment. Bear in mind that there is no guarantee that dollar cost averaging will ensure a profit, or protect your investment against losses in declining markets. Since this strategy involves continued investment, you should carefully consider your ability to continue purchases through periods of low price levels.

Sharon Stanley is a representative of The Prudential Insurance Co. of America in Cape Girardeau. (334-2603 )