by Archie M. Richards, Jr., CFP^®
October 4, 2004

"To protect yourself from losing in a bear market," say investment gurus, "use dollar-cost averaging."

This means that if you have a chunk of money to invest, don't throw it into stocks all at once. Dole it out in level amounts over time. The experts say that as prices fall, a given amount of money will acquire more shares.

If dollar-cost averaging is the only way you're willing to buy stocks, okay, go ahead. But be aware that dollar-cost averaging usually doesn't work. About two-thirds of the time, the stock market stays the same or goes up. When the market's rising, you buy fewer shares. If the market goes nowhere for a considerable time, you buy at about the same prices all the way along.

No one can consistently predict when prices will fall. If you guess, the market will go out of its way to fool you. Here's an example:

You wait for lower prices. They go up.

You continue waiting. Prices rise more.

Finally you say, "Oh to heck with it!" and you buy.

Then the market falls.

Don't try to outguess Ms. Market. She'll go out of her way to make you a jerk.

Some gurus say that the market going nowhere foretells a decline. It doesn't. Months of level prices foretells nothing. The market could continue staying level. It could go down. It could go up. In the late-70s and early-80s, the market stayed roughly the same for years. Then it rose tremendously.

In the short run, nobody knows what the market will do. In the long run, we know that it rises. Therefore, the best time to buy stocks is when you get the money.

"Okay," you say, "I want to buy stocks, but I don't have the money. Over time, I'll earn the money and invest a portion on a regular basis."

Now that's a different story. It's not because you want to invest gradually; it's because you have to. I don't even call this dollar-cost averaging. I call it buying when you get the money.

Let's say a financial planner advises you to put everything into the market at once. If the market rises, he gets no credit for this, because he's supposed to know when the market will rise. But if the market falls, he gets the blame.

Actually, neither the planner nor anyone else knows what the market will do in the short term. But the planner doesn't want to lose a client. He therefore suggests dollar-cost averaging. He has too much to lose if he doesn't.

If getting into the market gradually is the only way you can get in at all, go ahead, use dollar-cost averaging. But from purely an investment standpoint, the technique generally doesn't work. You're better off buying when you get the money.

Stay away from investments that are headline news. At this writing, oil closed at $49.51 a barrel, having exceeded $50 the day before. Avoid oil and oil-based investments. Both Russia and Iraq have far more reserves than most people think.

When you count your real estate, life insurance, investments, and everything else, you could be worth $1.5 million or more. Let's assume you are.

If you transfer more than $1.5 million to others during your life or at death, Uncle Sam assesses a transfer tax. The percentages are 35 percent minimum and 48 percent maximum.

Here's a way to get around transfer taxes: Make annual gifts to family members.

Without reducing the $1.5 million transfer tax exemption, you can give $11,000 a year to each of any number of people. The recipients don't even have to be relatives; any warm body will do. Your spouse can also give $11,000 to each of any number of people, even if the funds actually come from only one of you.

Let's say that you and your spouse jointly give $22,000 a year to each of 6 children and grandchildren. If you do this for ten years, $1.3 million pass free of transfer taxes.

All it takes is planning. Well, it also helps to have the money.