Averaging your mutual fund purchases works with selling, too

Riding a roller coaster in the summertime can be lots of fun. It goes along nicely with cotton candy, baseball, and sand in the living room. But if it's your money that seems to be on the roller coaster, that's not as much fun. In the last couple of years, investors in mutual funds have seen their funds reach breathtaking highs and then roll to screaming lows. Like now. After taking a 6.8 percent loss in the first quarter of this year, the 670 funds tracked by Lipper Analytical Services dropped another 3.09 percent in the second quarter.

This kind of record argues for a mutual fund investment technique known as ''dollar-cost averaging.'' Many investors have been doing this for some time, putting the same amount of money in their fund every month, quarter, six months, or however often they choose. Now, some investors are using the technique in reverse, to make withdrawals from their funds at retirement in such a way as to ensure that the fund will see them through retirement.

Because the price of mutual fund shares fluctuates with the market and the performance of the stocks in the portfolio, buying into a fund by dollar-cost averaging means you purchase a larger number of cheap shares in a down market and fewer of the more expensive shares in an up market. Then, when the market is rising, all those cheap shares start going up in value.

There are times when dollar-cost averaging is not the best way to go, points out the United Mutual Fund Selector, a newsletter published in Boston. In a steadily rising market, for instance, you should purchase more of the cheaper shares, then shift back to the more regular schedule when the market returns to a more even course. While the value of your shares will move up and down over time, you will come out ahead in the long run.

It is important to select the kind of fund for this kind of investing. The success of dollar-cost averaging depends on a long-term investment philosophy, measured in decades, not quarters. This means selecting one with good long-term performance, measured over at least 10 or 15 years.

This does not mean you should totally avoid all of the newer funds if you plan on dollar-cost averaging. There are some recently developed funds worth considering, such as those with conservative investment philosophies that can switch assets from stocks to cash equivalents when market conditions change.

Once you have figured out dollar-cost averaging, says Fred Kerpen, a financial planner in New York, you can use it in reverse when taking out money at retirement.

If the money in your mutual fund is part of a retirement nest egg, Mr. Kerpen says, you want to be sure the nest egg lasts as long as you live. You can do this, he believes, by redeeming a specific number of shares - as opposed to dollars, which were used to buy the shares - each month or quarter, depending on your needs.

An example of Kerpen's idea was recently outlined in the United newsletter. Here, it was shown what would happen if an investor wanted to make $600 worth of withdrawals over a six-month period.

By taking out $100 a month, the investor ends up redeeming 75 shares of a fund on which the share price fluctuates between $5 and $20 a share. But by redeeming 10 shares a month, the investor still ends up with about $600, but he has used only 60 shares of the fund, leaving 15 shares that can keep on growing.

Although there is no optimum number of shares that should be redeemed using this method, Kerpen says, you take out a certain percentage of your holdings every year. This percentage should be slightly below the growth rate of the nation's economy, as measured by the gross national product. With GNP currently growing at 8 or 9 percent, Kerpen says, a 7 to 8 percent withdrawal rate should keep your fund intact.

So if your latest statement shows that you own 1,000 shares of the mututal fund, don't redeem more than 70 or 80 shares a year.

Kerpen believes the best type of fund for this technique is the growth-oriented variety, one that can maintain a rate of appreciation at or above the GNP's growth rate. Here again, look for a fund with a good long-term performance record at keeping this growth rate.