Dollar-cost averaging: Make your investing automatic and increase your savings

Looking for some help to invest your money? I was too, when I was much younger.

Many decades ago, a person much smarter than me convinced me to start saving some of my money. (You mean, I don’t have to spend it all?) 

This friend advised me to put a bit of my weekly paycheque into an RRSP. Back then, I didn’t know that RRSP stands for registered retirement savings plan.

I also learned that putting money into an RRSP a few days before the annual deadline would often increase the amount in my tax return. But eventually, I learned that it’s better to make regular contributions into my RRSP throughout the year.

What is dollar-cost averaging?

Dollar-cost averaging is the practice of investing a consistent dollar amount into a given investment regularly. This allows you to invest, no matter how well the markets are performing. 

I invest the same dollar amount each month. When the value of the mutual funds in my portfolio was up, my money bought fewer fund units. That’s what happened during the technology bubble in 1999. When their value was lower – think 2009 – I bought more.

With any investment strategy, it’s a good idea to consider the potential pros and cons:

The benefits of dollar-cost averaging

Disciplined investing could lead to better financial well-being and more savings

Pre-authorized deposits allow you to invest a consistent dollar amount regularly. You may find you don’t need to think about your investment strategy all the time. Or worry that you’ve forgotten to contribute. Dollar-cost averaging thereby becomes a simple, hassle-free way to be a disciplined saver. Furthermore, because you’re consistently investing, this approach may allow you to save more money over time. 

Potentially reduces the effects of market ups and down

Periodic purchases can be weekly, monthly or quarterly. All come with the certainty that unit prices each time you buy will differ. This may lower the average cost of investing and allow you to purchase more units. It will also reduce the effects of volatility on your investment portfolio. 

Some things to consider about dollar-cost averaging

Possible loss of return

When markets are rising steadily, you may miss out on certain gains, when making several smaller purchases at different times. However, over the long term, the strategy of dollar-cost averaging can help reduce this risk.

Patience is part of this strategy

Dollar-cost averaging offers the greatest benefit to investors who have a long-term investment horizon. It also helps to be patient. That’s particularly true if they started such a discipline early on in life. If you don’t have a long-term investment horizon, it may not be the best way for you to invest.

The ups and downs of market values can cause stress, especially if you’re checking your investments every day. For me, committing to a dollar figure and regular saving helps me ignore market volatility. 

The truth is, I really don’t worry about volatile markets affecting my investments. That’s because I don’t take a short-term viewpoint, creating stress by checking my investments every day. And I’ve created a plan with my advisor. This long-term perspective gives me confidence about my financial situation, even when market values go through a rocky ride.

Read more about investing:

What is an RRSP?

You’ve made your RRSP contribution – now what?

3 guaranteed investment products you should know about