Investing can be very emotional. When the market is up, people tend to pour their money in. When the market is down, many investors “take their money and run.” Talk about counterproductive. Regular investing—also called “dollar cost averaging”—instills discipline to the process. If you have $1,200 and invest it all at once, depending on where market prices go, you could be ecstatic if the shares bought at $10 suddenly go up to $14. But, you could be shell shocked if the price goes to $5 and become paralyzed into not investing again. Whether the market is at a high or a low—or anywhere in between—dollar cost averaging keeps you investing. Automatic investment plans, whether through your employer or one you set up, are an easy way for you to take advantage of dollar cost averaging.

Systematic investing does not assure a profit and does not protect against loss in declining markets. Investors should evaluate their long-term financial ability to participate in a systematic investment plan.

The latter part of 2007 and 2008 will likely be remembered by many as a time filled with great uncertainty and volatility in the global markets. But, remember, investing regularly is a smart way to hedge against uncertainty. Simply put, it’s not WHEN you invest, it’s WHAT you invest. Many investors know there are two phases of investing: accumulation and distribution—or loosely put: building up and using up. During the accumulation phase, the primary goal is to build up shares. In our chart, we show that if a hypothetical investor makes a lump sum investment of $1,200 at $10 per share, the investor would have 120 shares. If the investor opts to dollar cost average $100 per month for twelve months, the portfolio would have more shares—144. These may seem like small numbers, but if you build a retirement nest egg over decades, it could mean the difference between being able to sell 12,000 shares versus 14,400.

Dollar cost averaging works especially well in volatile times. Making investments in a fixed dollar amount at regular intervals buys more shares when prices are lower and fewer shares when prices rise. So, over time dollar cost averaging may lower the average price per share paid and can help smooth out the effects of volatility in a portfolio. In our example, the lump sum investor paid an average of $10 per share while the one who bought shares monthly paid closer to $9 per share. Dollar cost averaging isn’t just for novices—this shrewd portfolio-building method is great for seasoned investors as well.

Invest $1,200 All at Once or Over Time?
Regular Investing May Smooth the Ride

Past performance does not guarantee future results. This chart is shown for illustrative purposes only and is not intended to represent the performance of any Oppenheimer fund. Systematic investing does not assure a profi t and does not protect against loss in declining markets. Before investing, investors should evaluate their long-term financial ability to participate in such a plan.

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting www.oppenheimerfunds.com or calling 1.800.525.7048. Read prospectuses carefully before investing.

At no time since the Great Depression have college students worried more about money. Tuition continues to rise, financing sources continue to contract. So why should a student worry about finding money for, of all things, retirement?

Because even a few dollars a week put toward a Roth IRA can reap enormous benefits over the 40-50 years of a career lifetime that today’s average college student will complete after graduation. Take the example of an 18-year-old who contributes $5,000 each year of school until she graduates. Assume that $20,000 grows at 7.5 percent a year until age 65 – that would mean more than a half million dollars from that initial four-year investment without adding another dime.

Consider what would happen if she added more.

There are a few considerations before a student starts to accumulate funds for the IRA. First, students should try and avoid or extinguish as much debt – particularly high-rate credit card debt – as possible. Then, it’s time to establish an emergency fund of 3-6 months of living expenses to make sure that a student can continue to afford the basics at school if an unexpected problem occurs.

Certainly $5,000 a year sounds like an enormous amount of outside money for today’s student to gather, but it’s not impossible. Here’s some information about Roth IRAs and ideas for students to find the money to fund them.

The basics of Roth IRAs: It’s good to start with describing the difference between a traditional IRA and a Roth IRA and why Roths might be a better choice for the average student. Traditional IRAs allow investors to save money tax-deferred with deductible contributions until they’re ready to begin withdrawals anytime between age 59 ½ and 70 ½. Roth IRAs don’t allow tax-deductible contributions, but they allow tax-free withdrawal of funds with no mandatory distribution age and allow these assets to pass to heirs tax-free as well. If someone leaves their savings in the Roth for at least five years and waits until they’re 59 1/2 to take withdrawals, they’ll never pay taxes on the gains. For someone in their late teens and early 20s, that offers the potential for significant earnings over decades with great tax consequences later.

Getting started is easy: Some banks, brokerages and mutual fund companies will let an investor open a Roth IRA for as little as $50 and $25 a month afterward. It’s a good idea to check around for the lowest minimum amounts that can get a student in the game so they can plan to increase those contributions as their income goes up over time. Also, some institutions offer cash bonuses for starting an account. Go with the best deal and start by putting that bonus right into the account.

It’s wise to get advice first: Every student’s financial situation is different. One of the best gifts a student can get is an early visit – accompanied by their parents – to a financial advisor such as a Certified Financial Planner™ professional. A planner trained in working with students can certainly talk about this IRA idea, but also provide a broader viewpoint on a student’s overall goals and challenges. While starting an early IRA is a great idea for everyone, students may also need to know how to find scholarships and grants and smart ideas for borrowing to stay in school. A good planner is a one-stop source of advice for all those issues unique to the student’s situation.

Plan to invest a set percentage from the student’s vacation, part-time or work/study paychecks: People who save in excess of 10 percent of their earnings are much better positioned for retirement than anyone else. Remarkably few people set that goal. One of the benefits of the IRA idea is it gets students committing early to the 10 percent figure every time they deposit a paycheck. It’s a habit that will help them build a good life.

Get relatives to contribute: If a student regularly gets gifts of money from relatives, it might not be a bad idea to mention the IRA idea to those relatives. Adults like to help kids who are smart with money, and if the student can commit to this savings plan rather than blowing it at the mall, they might feel considerably better about the money they give away. At a minimum, the student should earmark a set amount of “found” money like birthday and holiday gift money toward a Roth IRA in excess of the 10 percent figure.

August 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V. Higgins, CFP, CLU, AEP, a local member of FPA.