When markets fall, your immediate thought might be to sell. Or you may have cash and you are wondering when to invest. Research has shown that if you try to time the market, it could cost you more to leave than to stay invested. Often, when markets recover, it happens suddenly and leaves little time for investors to react. One excellent strategy to deal with market fluctuations is with dollar-cost averaging (DCA).
Dollar-cost averaging doesn’t tell you what investment to buy, but it does away with the problem of trying to figure out when to buy. Dollar cost averaging can be seen as a way to reduce risk for investors who would usually be reluctant to invest due to market uncertainty. You don’t have to agonise over picking the right time in the marker, and best of all, your buying price will be lower on average.
With fluctuations in the marketplace, sometimes the cost per unit will be higher, sometimes it will be lower. When the price is lower, you end up buying more units than when the price is higher. Over time, it works out that you buy more units when the price is low and you may end up with more units in total than you would if you tried to figure out when the market was going to provide you with the best outcome. With dollar-cost averaging, you spread out your purchase in equal installments over a pre-determined period of time.
An Example of Dollar Cost Averaging
Mary decides to use dollar cost averaging and wants to invest $200 on the 1st of every month. Below is a hypothetical example what happened after five months:
Price per share
# shares purchased
Total # shares
(total shares x price)
*For Illustrative Purposes Only
At the end of this period, Mary had purchased invested $1,000 and purchased 103.58 shares. While her average cost was 9.80 per share, her total shares are now valued at $1,139.38.
What is the likelihood she would have picked the time in the market to buy all of the shares when they were priced below $9.80? Would it be hard to deposit the whole $1,000 at a single time when markets are down? By depositing the same dollar amount every month, she has lowered her average cost per share.
How can DCA help you?
Provide a disciplined approach — DCA helps make sure that you don’t try to “time” the market and that you continue to invest even when markets are down (with opportunities to invest at lower prices).
Give you peace of mind — Regular contributions means not having to worry about investing at a “high” point in the market or missing an opportunity to invest at low prices. As a result, you may receive, over time, a more average investment price.
Is DCA right for you?
- If you’re looking for an investment strategy that will help provide more consistent returns over the long run
- If you want to make regular contributions instead of lump sum payments
By staying invested, you won’t miss out on the best days that make up some of the market growth. Strong performance occurs on a handful of single days over a longer period. There’s no way to predict these strong days. Also, by using the dollar-cost averaging approach, it may help smooth out market fluctuations, and over time, it can help lower the average price per unit purchased and provide the potential for higher capital appreciation.
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- Elaine Kelly, MBA CFP, FCSI, Senior Investment Advisor, Manulife Securities Incorporated
- David Wyatt, BA, B.Comm, CFP, Investment Advisor, Manulife Securities Incorporated
- Katlin Wyatt, BA, Investment Advisor, Manulife Securities Incorporated
- Diana Kancko, Executive Assistant, Manulife Securities Incorporated
- Terry Wyatt, Executive Assistant, Manulife Securities Incorporated