Dollar Cost Averaging

A Winning Investment Strategy

Buy low and sell high. That’s the aim of every investor. Yet no one has ever been able to predict exactly when to act—not even the experts.

Short and mid-term markets are impossible to predict, so don’t try to “time the market”, hoping to hit the upswings and avoid the drops. It’s a gamble, and as such could be very costly. Remember it is about time in the market and not timing the market

Instead, savy investors often use a strategy called dollar cost averaging. This is a simple, convenient, and disciplined way to buy shares over the long term.

Here’s How It Works

Each month or quarter, you invest a fixed dollar amount in an investment product regardless of the price at the time. Naturally, you’ll be paying a lower price for some units than others, since prices fluctuate.

It also means that there will be some months when your fixed amount buys more units than in other months. Over the course of time, your average cost per unit will most likely be lower than if you had bought all your units at once, with a single lump sum investment.

Another advantage of dollar cost averaging is that you can invest small amounts each month. Taken together, these easy-to-manage amounts can add up to more than you could have invested with a single lump sum. Better yet, investors who take advantage of this disciplined approach tend to sleep better at night, never having to worry if they made their investment at “the right time”.

Two Investors, Mr. Smith and Ms. Jones

In January, Mr. Smith invested $4,800 in a mutual fund. He buys 192 units at $25.00 each.

Ms. Jones invests $4,800 too. But she instead invests $200 a month for 24 months.

As the Chart shows, over 24 months, the unit price of the fund fluctuates. As a result, Ms. Jones is able to buy 203 units. At the end of the 24 months, Ms. Jones has paid an average of $23.65 per unit. Mr. Smith paid $25.00 per unit.

At the end of the period, Mr. Smith owns 192 units and has an investment worth $5,568.00. Ms. Jones, who owns 203 units, has an investment that’s worth $5,887.00. Ms. Jones’ total investment is worth $319.00 more than Mr. Smith’s investment.

This hypothetical example helps illustrate the power of dollar cost averaging. 

This hypothetical situation does not represent the results or future returns of any particular investment, and is meant for illustrative purposes only.

The information contained in this commentary is designed to provide you with general information only, and is not intended to be comprehensive advice applicable to the circumstances of any individual. We strongly urge you to seek professional assistance before acting upon information included herein.