A reader asks for an explanation of dollar-cost averaging.
This refers to the strategy of investing funds on an incremental basis rather than all at once. An installment of, say, $300 on the fifteenth of each month rather than $3,600 on the ides of March each year makes excellent sense. It protects you against the risk that the stock or mutual fund is at or near its high of the year on the day you invest. It also gains you the benefit of a regular savings program requiring only adherence and no subsidiary decisions. That's how the pros do it. And the same applies when disposing of a security. Don't sell all at once, but a piece at a time. Say you hold 200 shares of IBM stock; you have a profit, and you want to take some money off the table. You decide to reduce your holdings in half. If you don't need the cash right away, you might sell 50 shares today, then wait a while to take advantage of the stock's volatility before selling the other 50. A recent quote for IBM is $118.93, which is on the high end of its range for the year, a good price if you're selling. But if you do not dispose of all your shares at once, you have hedged your bet: you have guarded against the possibility that the stock will go even higher. And it might. It just might. That sense of "hedge," by the way, is the logic behind many a "hedge fund," a restricted-entry mutual fund for high-rollers.