What is dollar-cost averaging?
Dollar-cost averaging helps you take advantage of changes in the market. A constant monthly contribution allows you to buy more mutual funds when the unit price is low, and less when the unit price is higher. This can be particularly beneficial when the markets are volatile by helping to lower the average cost of the units you purchase. When contributing a lump sum, all units are purchased at the same price.
If you find saving money next to impossible, you are not alone. Many Canadians find that the biggest obstacle to meeting their goals is putting money aside after their living expenses. Dollar cost averaging is an excellent way to save and to minimize volatility risk and maximize returns. By purchasing the same dollar amount on a regular basis, you buy more units when prices are low and fewer units when prices are high. The result is a lower average cost per unit over time.
Dollar-cost averaging is a strategy that involves investing equal amounts of money in a mutual fund at regular intervals, regardless of whether the market is going up or down. Over time, this strategy may reduce your average share price, since you acquire more shares when prices are low and fewer shares when prices are high. Keep in mind, however, while dollar-cost averaging is a well-known and frequently used investment strategy, it does not ensure a profit or guarantee against a loss.
You don’t have to be a genius to make smart investments if you take advantage of the strategies of dollar cost averaging and diversification. Even the biggest investment dunce can take advantage of the natural upward growth of the stock market over time, through the use of dollar cost averaging. A Conservative Approach to the Stock Market Investment moguls attempt to predict the way the stock market is going to behave. The principal of “buy low, sell high” requires an intimate knowledge of the marketplace, experience with the performance of stocks and a good deal of luck. Dollar cost averaging doesn’t rely on this strategy; instead, investors put a set amount of money into the stock market at regular intervals, regardless of market performance. In this manner, investors can avoid the huge loss potential of investing a large lump sum right before the market declines. Instead, you purchase stocks at every price, high and low, and the dollar-cost averages out. Dollar Cost Averaging as an
Contract owners who pay premiums can take advantage of dollar-cost averaging programs, which are offered under many variable annuities. For example, an owner may choose a stock fund to which he or she wants to allocate a substantial premium. If the allocation is made at one time, it is possible that a single price could be locked in at a time when share prices of the stock fund are relatively high. With dollar-cost averaging, the premium is periodically transferred (typically from the fixed account option or the money market investment option) to the stock fund over a selected period of time, with the purpose of investing at lower as well as higher prices. While dollar-cost averaging does not ensure a profit or protect against a loss, it can be an important investment technique.
