Dollar cost averaging is a convenient way to build a portfolio and reach your long-term financial goals.
Investors often worry about finding the perfect time to invest. By waiting to catch the next market upswing, many investors delay investing longer than they should. This risk of not being invested can be even greater than the risk of investing at the wrong time. Rather than trying to time the market, invest as early as you can – and stick to a regular investing plan – to benefit from the power of compound growth.
The benefits of discipline
Discipline can pay tremendous rewards over time. By being disciplined and consistent with your investing, you can avoid missing out on potential gains when markets rise and from incurring potential losses by selling at the wrong time. Smart long-term investors know to stay invested through good markets and bad.
Dollar cost averaging is simply the discipline of investing a fixed amount at regular intervals. It eliminates having to predict when an investment will be at its high or low, since those predictions are rarely accurate. By investing gradually and systematically, you may lower the impact of dramatic market swings.
Dollar cost averaging during falling and rising markets
By investing regularly, you can potentially buy more units of a mutual fund when prices are low and buy fewer units when prices are high, which may result in a reduced purchase price over time. Since most people invest for the longer term, temporary dips in a fund’s price should be welcomed because they will allow for greater accumulation of units.
Amounts shown in this illustration represent hypothetical purchases at hypothetical values and is provided for illustration purposes only. The actual unit prices of the fund may vary.
Running with the “PAC”
One sure-fire way to take advantage of dollar cost averaging is to start a pre-authorized contribution (PAC) plan, which automatically invests a set amount every quarter, month or pay period. Essentially, you’ll take money you might have spent and invest it towards your financial goals instead.
PAC plan benefits include:
- It’s automatic. When you set up a PAC plan, you eliminate the challenge of trying to find money to invest in a registered retirement savings plan or other investment account.
- You benefit from compounding. PAC plans also take advantage of the benefit of long-term compounding since you maintain market exposure at all times and are consistently adding to your investment.
- It makes saving easier. Because you invest a set amount each period, you ensure that your money won’t be spent on something else. PACs are also suitable for people who may lose track and simply forget to invest at regular intervals. It’s really a convenient way to follow that wise investment adage: “Pay yourself first.”
Remember that successful investing is about time in the markets, not timing the markets. When investors sit on the sidelines waiting for that perfect investment opportunity, they’re actually missing out on the opportunity to put their money to work for them.
To learn more about staying invested and disciplined during volatile times, talk to your financial advisor or visit AGF.com/RethinkVolatility.
The contents of this Web site are provided for informational and educational purposes, and are not intended to provide specific individual advice including, without limitation, investment, financial, legal, accounting or tax. Please consult with your own professional advisor on your particular circumstances.