Dollar-Cost Averaging – A Strategy for Times of Market Volatility
For anybody that isn’t familiar with the term “Dollar-Cost Averaging”, it is a strategy that requires you to buy a set amount of the same investment(s) (whether that is a stock, mutual fund, etc.) in regular intervals regardless of market conditions. Anybody that makes regular monthly contributions to their RRSP or TFSA is essentially using this strategy. Using this strategy makes even more sense during periods of market volatility and market pullbacks. If you can apply the discipline of purchasing the same investments every period (monthly, bi-weekly, etc.) as the price of these investments drops, then you will be lowering the average cost of the investment(s) that you are purchasing.
For example, if you buy 1 share in a stock at $10/share, and then you subsequently buy 1 more share of that same company a month later at $9/share, your average cost base is $9.50/share. When the market conditions improve and share prices begin to rise again, you will be setting yourself up for bigger gains made on the shares that you purchased at lower prices. It may feel a little uncomfortable to buy investments when markets are volatile, it is definitely the time to incorporate a disciplined buying strategy to take advantage of the lower share prices/buying opportunities without trying to time the market.
Written by:
Jon Glougie, CFP®, CIM®
Associate Portfolio Manager
Luft Financial, iA Private Wealth
