Dollar cost averaging

Strategy helps you capitalize on market volatility

An easy and effective strategy for building long-term wealth without letting your emotions get in the way is dollar cost averaging.

Simple to implement, it involves pre-arranging to invest a fixed dollar amount in the same fund or portfolio at regular intervals (e.g., monthly). The set dollar amount means you'll automatically acquire more units when prices dip lower and buy fewer units on the upswings. As a result, it tends to "average down" your investment costs and potentially increase your returns over time.

Some people saving for long-term goals stop investing in volatile markets. But the following example shows how you can use dollar cost averaging to take advantage of market fluctuations and pick up extra units at bargain prices.

You can see that once prices recover, this investor ends up with 54.7 units purchased at an average cost of $36.56 ($2,000 in total) and now worth $40 ($2,188).

There are several other benefits to saving this way. Here are a few:

• Reduces timing risk. Do you have a lump sum to invest but worry about buying in at a bad time? Use dollar cost averaging to systematically ease back into the market and smooth out the risk.
• Provides saving discipline. Don't have a lump sum to invest? Dollar cost averaging offers a painless way to invest smaller amounts throughout the year, ensuring you "pay yourself first".
• Generates tax benefits. If you invest regularly in an RRSP, you can apply to have your payroll tax deductions reduced. This leaves more cash flow, which you can invest or use for other priorities.

Our team is a huge fan of these regular investment plans for almost everyone saving for a long-term goal. They can be set up for RRSPs and RESPs for children's education as well as non-registered accounts. Give our office a call to get started today.