31 Oct Dollar cost averaging: Making investing automatic
Dollar-cost averaging has 2 advantages: It turns saving into a habit and it keeps you from trying to time the market.
About 20 years ago, I arranged for a monthly deduction to be made from my bank account and for that money to be invested in a portfolio of mutual funds as part of a registered retirement savings plan (RRSP).
As a result, I have never rushed to make a contribution before the RRSP deadline. I have invested a predetermined amount every month since 1997. Over time, my salary has risen and so I’ve increased that monthly contribution accordingly. I can say without reservation that I’ve saved more as a result of this approach.
This isn’t just about saving, though. What I’m describing is referred to as dollar-cost averaging. Its real power lies in the fact that I’ve invested the same dollar amount each month. So when the value of the mutual funds in my portfolio was up – as it was during the technology bubble in 1999 – my money bought fewer fund units. When their value was lower – think 2009 – I bought more.
It’s a deceptively simple idea. By committing to a dollar figure, and to regular saving, I have ignored market volatility. I’ve never timed the market. The truth is I really don’t think about it that much.
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