Mutual Fund Basics
Many investors focus primarily on the dollar value of their accounts. This can cause anxiety and sleepless nights during market declines.
But your share balance, or the total number of shares in your account, is just as important.
The number of shares you own doesn’t depend on the market; it’s an amount that you control. When you invest regularly, you will add shares to your share balance even as your account balance fluctuates. You may not be able to control the market, but you can continue to acquire shares by taking advantage of dollar cost averaging, which means consistently investing the same amount at regular intervals. And you’ll get a lower average cost per share over time by purchasing more shares when prices decline.
Share balance plays an important role in dividend-paying funds, such as growth-and-income, equity-income, balanced and bond funds.
Since dividends are paid based on the number of shares you own, your share balance can make a significant difference in your current and future dividend payments.
Consider a hypothetical $500 monthly investment in Standard & Poor’s 500 Composite Index, with all dividends reinvested, over the 20-year period ending on December 31, 2018. As the dollar value grew, so did the share balance and the investment’s income-producing power.
In this hypothetical example, the investor received $43 in dividend payments in 1999 based on 5 shares owned by year-end. By the end of 2009, having acquired 63 shares, the dividend payment grew to $1,331, a considerable difference. With 111 shares by the end of 2018, the dividend payment grew to $5,548.
If you own a dividend-paying fund, choosing to reinvest your dividends, rather than taking them in cash, is another way to help your share balance grow. If you’re investing in a retirement plan, dividends are reinvested automatically.
One of the reasons the investor in our example above was able to acquire 111 shares was because of reinvested dividends, which help share balance grow even when financial markets are flat or falling. Reinvesting dividends resulted in 23 additional shares and a larger account value than if dividends hadn’t been reinvested. In fact, the dividend payments themselves grew as well.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
Standard & Poor's 500 Composite Index is a market capitalization-weighted index based on the average weighted results of approximately 500 widely held common stocks.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.
Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.