Dollar cost averaging and your portfolio
Steady as you grow
What is dollar cost averaging?
Successful investing means buying low and selling high. But predicting the right timing is impossible to do when markets go up and down every day. When is the right time to buy? Or sell? Very few investors are successful at timing when to buy an investment or when to sell it. There is a way to benefit from market highs and lows without having to get the timing right. It’s called dollar-cost averaging.
- Dollar-cost averaging involves investing a set amount at regular intervals through thick and thin.
- Lump-sum investing means investing a larger amount of money all at once.
- Market timing refers to the act of trying to predict the future direction of the markets and attempting to profit from making the right prediction
The case for dollar cost averaging
While dollar-cost averaging has been the tried-tested-and-true method for generations of savers, recent debate has raged over whether it’s the most effective. Does lump sum investing work better? The answer lies in how much and when it’s invested. The graph below shows the performance of the markets over time across a variety of conditions. As you can see, sometimes lump-sum investing might work but sometimes it might not. It’s impossible to know whether the market will rise or decline over a given period of time. Dollar cost averaging helps take the emotion out of investing. It removes market timing from the investment decision.
3 steps to consider
- Start early. The longer it takes you to invest, the lower the total return. The market has a tendency to rise over time, so you’ll want to start saving as soon as possible to benefit.
- Don’t focus on unit prices. It’s best to ignore the short-term fluctuations in the price of different funds. Instead, focus on accumulating more units and keep an eye on your long-term investment goals. When prices fall, you are able to accumulate more units at a lower cost.
- Prepare for market ups and downs. Dollar-cost averaging is a way to take the emotion out of investing and avoid the temptation of market timing by regularly socking money away. Remember to take a long-term perspective and focus on your end savings goals, even in a down market.
The bottom line?
Dollar-cost averaging is a regular commitment to paying yourself first despite market fluctuations. It’s a disciplined saving strategy that makes sense for many investors since it takes the guess-work and emotion out of investing. An advisor can help you set up an investment plan involving regular contributions that makes sense for your situation. An advisor can also help you monitor and rebalance your investments when necessary while acting as a coach to help you avoid selling low and buying high.