Dollar-cost averaging (DCA) helps investors through market swings and lowers long-term costs, says BMO InvestorLine.
DCA involves investing a fixed amount of money on a regular basis – whether the market is up or down – over a specific period of time. As a result, an investor buys fewer shares when prices are high and more when prices are low.
“Over a longer time horizon, this strategy offers the potential to accumulate more shares of a company or units of a fund at a lower cost per share than if invested as a one-time, lump sum,” says Viki Lazaris, president and CEO, BMO InvestorLine. “By investing systematically, an investor will be less tempted to make decisions on the basis of short-term events and their emotions.
As a result, their fortunes will not depend on their ability to make the right call, at the right time, about future trends, she adds.
BMO’s Psychology of Investing Study found that two in five Canadian investors (40%) say their emotions play a role in their investing decisions. The study also reveals that nearly 60% of Canadians have invested on impulse at least once.
Some tips to keep emotions in check and make the most of DCA:
Invest long term: A DCA investor decides the time horizon over which all of the investments are made. With a shorter time horizon, the strategy will be more similar to lump-sum investing. As a result, investors may not reap the averaging benefits.
Market awareness: Since DCA involves continuous investing regardless of fluctuating prices, keep actively investing on your own through periods of low price levels.
The tradeoff: If markets trend upward, you would have been better off investing the entire lump sum as early as possible. And if prices move steadily downward, you would have been better off investing the lump sum near the bottom. But unfortunately no one can predict the future, and using a disciplined strategy like DCA is likely to deliver better long-term results than trying to time the market.