Dollar cost averaging is a proven investing strategy

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Dear Money Lady:

We are now close to the end of the year and I had great intentions to save and invest in my RRSP this year. But I have not saved anything. I’m going to blame COVID – but it was really just me not making it a priority. My financial planner said I should take out an RSP loan but then I will have debt next year that I have to pay off.

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There must be a better way – is there?

Kaylie

Dear Kaylie:

You are totally not alone. Trying to save money and invest in an RRSP or TFSA once a year is challenging for most Canadians. It is difficult to plan life events throughout the year, let alone save to invest in the market. Often by the end of the year, most people find they have not made the investment savings they had hoped to make when the year started.

By waiting until the end of the year, most find that they lack the funds to invest or have to use a line of credit or RSP loan to make up for lost savings to invest in a tax advantaged registered plan, (just as your advisor suggested). Even if you did have the funds, making a one-time lump sum investment still is not as advantageous as a structured accumulation strategy because it potentially causes you to lose out on compounding investment and dividend returns.

Why not consider dollar cost averaging? It is by far, one of the best accumulation strategies that can easily be fit into your monthly budget, and is simple and effortless for the average investor. It removes the need for you to time the market or to try and predict the optimum moment to invest in an investment.

Market timing is very difficult, even for the professionals. With this strategy, an investor decides how much to invest on a monthly basis and then makes a regular deposit to their savings strategy according to their asset allocation.

By contributing on a monthly basis, you can ensure that you will not miss out on market upswings. While it is true you may be at times buying stock that is at a higher price, the basis of this concept is that by investing regularly, the average cost of the investment over the long run tends to be lower. F

or those investors who took advantage of this accumulation strategy this year during the COVID pandemic; many will find that they have yielded a much higher average per unit cost and will therefore realize a greater return over the next few years.

Dollar cost averaging has been a proven strategy for decades, no matter what has happened in the market. Investors stand a much better chance of investing some of their money when the market is at its lowest point thereby increasing the growth, compounded interest and dividends, and ultimately making more on their overall portfolio.

Talk to your advisor about dollar cost averaging for your retirement portfolio.

I have many clients using this strategy and can say with great confidence that this method really does work and many investors who use it, when asked, would never invest any other way.

Good Luck and Best Wishes,

Money Lady

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Written by Christine Ibbotson, author of the best-selling book, How to Retire Debt Free & Wealthy, and a new book Don’t Panic – How to Manage your Finances and Financial Anxieties During and After the Coronavirus. Both are available at all bookstores across Canada. If you have a money question, please email on website: www.askthemoneylady.ca