Here’s a smooth strategy for bumpy times

Sick and tired of hearing all the bad news related to market volatility? Well, here’s some good news: When financial markets are turbulent, they present a golden opportunity to buy investments at lower prices.

An easy, effective way to do that is through dollar-cost averaging. This strategy involves investing a fixed amount at regular intervals, no matter how markets are performing. When markets dip and investment prices fall, the amount you regularly invest buys more shares or fund units. Over time, this can reduce your average cost and, in a rising market, increase your returns when you sell.

How dollar-cost averaging works

Here’s an example to show how it works. Suppose you decide to invest $1,000 a month in company XYZ. Over a six month period, the share price of XYZ fluctuates between $20 and $25, with the following results:*

  • Month 1: $22. Shares purchased: 45
  • Month 2: $20. Shares purchased: 50
  • Month 3: $22. Shares purchased: 45
  • Month 4: $21. Shares purchased: 47
  • Month 5: $23. Shares purchased: 43
  • Month 6: $25. Shares purchased: 40

Total shares purchased: 270

Average price per share: $22.22

Return on investment: $750.60

It’s easy!

Setting up a dollar-cost averaging program is fast and easy. Money can be transferred automatically from your bank account or other sources to regularly buy shares or mutual funds of your choice. You can invest monthly, quarterly, or semi-annually — whatever is most convenient for you.

When you purchase mutual fund units, fund distributions are automatically reinvested in additional fund units, augmenting your strategy. With dividend-paying stocks, you can reinvest automatically by participating in any dividend reinvestment plans available.

Automatic investments can be set up for any type of account, including Registered Retirement Savings Plans (RRSPs) and Tax- Free Savings Accounts (TFSAs) as well as nonregistered accounts.

Avoid market timing

There’s one more important advantage to regular investing: It helps keep the temptation of trying to “time the market” at bay. When you invest regularly, you don’t need to worry about trying to buy low and sell high. Attempting to pick the best times to purchase and redeem investments is fraught with difficulty. Even professional investors don’t do it well.

* Example provided for illustration only; excludes commissions, fees, taxes