One of the hallmarks of personal savings strategies is to consistently invest in a diverse group of assets, and to do so early and often. This is a concept called Dollar-Cost Averaging, and it’s part of what robo-advisors base their services on. This investment strategy is also what many robust retirement accounts have to thank for their size (not avocado toast).
Here’s how dollar-cost averaging works:
If you have a relatively small amount of money invested frequently (for example on every pay day and not just once per month) those amounts will add up gradually and passively over time without you really noticing the loss in your chequing account or the growth in your savings account — but one day you’ll glance at your savings account, and your heart will burst with pride.
Dollar-cost averaging is perfect people who don’t really care too much about investing, or don’t have the time to actively make investment decisions OR the money and expertise to operate a brokerage account.
Dollar-cost averaging benefits the more laid-back investor in two key ways:
Behaviourally:
Committing to invest money for the future and actually doing it are different things. By setting up a manageable amount to come out automatically when money goes into your account, it gets easier to adjust spending so that money actually gets saved. By saving smaller amounts frequently, you can also avoid feeling some of the anxiety that you might if you were trying to invest a lump sum of your savings at once: “Is this the right time? The right investment?”.
Technically:
Timing the investment market can be a fool’s errand at times, even for seasoned industry professionals. The technical aspect is where the averaging comes in; by investing regularly you avoid always buying at the wrong time, or high.
Think of dollar-cost averaging like this:
Dollar-cost averaging is a lot like buying fruit. Sometimes berries are in season and you can get a few containers more cheaply, and sometimes they’re out of season and you end up paying a higher price. The trouble is that, as a vitamin and flavour conscious individual, you want the berries year round; so you agree to get a container each week, and the price averages out to what it should be.
Dollar-cost averaging is also a lot like buying clothes. Sometimes the items you want are on sale, and sometimes you pay the ticket price. Whichever price you get it at that item looks and feels the same.
Begin your life as a laid-back dollar-cost averager:
Most banks and financial institutions allow you to set this up for free yourself online or with the help of an advisor, and offer different ETF or mutual fund portfolios for you to choose from. Make sure that you are keeping your investment plan up to date with changes in in your circumstances and your goals.
Taking the time to set up an investment plan that uses this strategy sooner, can pay huge dividends later.
Thanks, Cool Bank Guy!