I am considering buying a mutual fund for the long term, five or 10 years, but I've never done it before except through my pension plan at work. With the stock market falling the way it is, is this a good time to invest? Or should I give it a little time to see if things will go down even further?

Paul's Answer:

I think you may already have the answer to this question, but you just don't realize it.

You've been investing for some time through your pension plan at work. Have you worried about this question in relation to those investments? I would guess you haven't, probably because you are putting aside money a little at a time, riding out the ups and downs of the market.

Imagine what life would be like if every time you got a paycheck you thought you had to figure out whether you should buy into the market or "give it a little more time." There is always some reason you could use to postpone an investment decision. If the market is going down, you could decide to let it go down farther before you buy. If the market is going up, you could worry that prices are getting too high, and all the "good deals" may already be gone.

You have solved this problem at work by regularly investing a regular amount - and simply not worrying about the ups and downs. This is called dollar-cost-averaging, and it means you buy more shares when prices are low and fewer shares when prices are high.

One result is that your average cost per share is automatically lower than the average of all the individual prices on the days you buy. It's a neat trick of mathematics, and it doesn't take any effort or analysis or brainpower on your part.

Perhaps the most important result of this plan is that you keep investing.

Now if dollar-cost-averaging works for you when you're investing in your retirement program, why wouldn't it work equally well for your other investments? I think it would.

Therefore, I suggest you start investing some regular amount at regular intervals - whatever works for you. Just keep putting the same amount in regardless of what's happening in the markets.

Predicting prices on a short-term basis is essentially impossible. There's a word used to describe investors who try that: "speculators." There's another word that describes most of them: "unsuccessful." My advice: Don't play that game.

What I've said so far assumes you'll be investing surplus cash flow regularly. But if instead you are dealing with a lump sum of money, as from an insurance settlement or an inheritance, then you have two choices.

You can invest it all at once, and hope that your timing doesn't turn out to be disastrous, as in just at the start of a big bear market. Or you can spread out the investments in equal amounts over a year or two. Each approach has its advantages and disadvantages, and you won't find out until it's too late which one is better. One way around that dilemma is to invest half the money all at once, and spread the rest out over a couple of years.

The choice is up to you, and nobody can tell you which will be more productive. If I were doing it, I'd spread the investments over one to two years, because I believe there's a high likelihood of a bear market in the near future. But I could be wrong!