Dollar-cost averaging
“Investing is the age-old, never-ending emotional battle between fear of the future and faith in the future.”
– Nick Murray, financial services professional
After paying rent or the mortgage, buying groceries, putting gas in the car and covering a variety of other monthly expenses, it might feel as if there’s little money left to think of investing for the long term. Thanks to higher-than-normal inflation, Canadians are under increasing financial pressure. In a recent Manulife Bank survey, 79 per cent of respondents felt worried about their ability to save for retirement.[1]
At times when financial markets are volatile, you may be reluctant about committing your hard-earned money toward an investment all at once. Instead, breaking up your capital into monthly contributions toward an exchange-traded fund (ETF) or a mutual fund could balance out the cost over a defined period of time despite market fluctuations. This way, you end up buying fewer units when the cost is higher and more units when the cost comes down. This systematic investment strategy is known as dollar-cost averaging (DCA), and it has its benefits.
The DCA advantage
Financial markets can be fickle, and their unpredictable ups and downs can trigger a range of emotions, from joy and euphoria when prices are on the upswing to anxiety and panic when values head downward. There’s the bandwagon crowd that gets caught up in the fear of missing out – buying when a stock price soars. And then there’s the nervous investor who, fearing the worst, sells a stock when the price drops.
In both market scenarios, investors are prone to making snap decisions that could seriously affect an investment portfolio. But a DCA approach can help take emotions out of the equation. Here are the basics:
The same amount of money is invested on a regular schedule, regardless of market fluctuations, to buy stocks, mutual funds or ETFs.
- When prices are high, this regular, recurring amount buys fewer units.
- When prices are low, that same amount buys more units.
Depending on the average purchase price per unit over a given period, you may actually end up paying less per unit over the long run – acquiring more units than if you had made a lump-sum purchase.
Most importantly, you’re investing regularly without being affected by the emotional highs and lows of market volatility.
As noted above, adopting a systematic investment strategy has benefits. Rather than trying to time the market and hoping to buy when prices are low, let the law of averages and the DCA approach work in your favour.
Schedule a meeting with your advisor to review your investment goals and discuss whether DCA makes sense for you. Watching this video on goals-based investing could also be useful in helping you map out next steps.
[1] Manulife Bank Fall 2022 Debt Survey
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