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Investment Basics

Dollar cost Averaging

Many Canadians struggle to make a large lump-sum contribution each year to their savings accounts or to their RRSP before the annual deadline. The problem with this approach is that it can be difficult to come up with enough money to make an effective contribution. Contributing through a regular investment program is one of the simplest ways to ensure that you are saving on a regular basis, while managing the risks of investing in the process.

The following chart highlights the advantages of a slow, steady investment plan:

Dollar-cost averaging in a fluctuating market

If you have time on your side, dollar-cost averaging, or DCA, can be an effective strategy for helping you make the most of your investment experience. DCA can be used with mutual funds and segregated funds. With a DCA program, you invest equal dollar amounts at regular and continuing intervals, regardless of what the market is doing.

By investing a fixed amount while the share cost fluctuates,

  • You buy more shares when prices are low
  • Buy fewer shares when prices are high, and
  • You may end up with an average share cost that is lower than the average share price over the investment period.
While dollar-cost averaging cannot assure a gain or protect against losses in a declining market, it does provide the discipline to invest no matter how the markets are performing day to day.

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