It’s no secret that the financial markets have been volatile in recent months—but while volatility can be stressful for investors, it’s not unexpected, unprecedented or unmanageable. In fact, market volatility is perfectly normal! The markets dip and then they recover—they are inherently in motion and will always have ups and downs—and the secret is knowing how to ride these waves while minimizing risk. When this is accomplished successfully, it ensures you’ll make the most of your earnings and steadily grow your wealth over time.
If long-term financial success is your goal, dollar cost averaging is a simple and effective way to achieve it. Here are a few things to know about market volatility, dollar cost averaging and investing your savings.
What is Dollar Cost Averaging?
Dollar cost averaging is an investment approach that involves putting money into mutual funds on a regular basis over a significant period of time (think years, not weeks or months). Simply put, it means contributing a set amount of money in an investment account on a consistent schedule (weekly, bi-weekly or once a month) in order to achieve optimal returns. It’s best to set up an automated deposit so these contributions are never missed—after a while, you won’t even notice the withdrawals! You can gradually increase the contribution amount over time or adjust it to reflect changes to your income.
Here’s how it works. Let’s say you decide to invest $100 per month (this may be divided into two $50 payments—perhaps one from each pay cheque you receive). When you invest in a mutual fund, you are essentially buying shares in a portfolio of stocks. The value of these shares changes throughout the year as the market moves up and down—meaning, sometimes your $100 goes farther than other times. While $100 may get you ten units of a given stock one month, it may get you nine or eleven units another month. When the price of various stocks goes down, the value of your portfolio decreases based on what you already own—but your $100 monthly investment buys more units than it would have when the market was up. This means that when the market starts to recover and the value of these stocks increases again, your portfolio goes up with it—typically more than if you’d invested all of your annual contributions at once. Dollar cost averaging is a simple, low-effort/high-result strategy with a proven history of success—as long as you’re willing to play the long game.
Making the Most of Your Income
There are two reasons this strategy works well for so many investors. First, you can control the amount you invest each month in order to manage your budget and maintain a healthy cash flow. Some individuals can invest $50 a week while others start with just $50 a month—anything is better than nothing, so the most important thing is to get started. This type of investing is manageable no matter what your income level is. It’s a slow and steady approach that’s ideal for investors with a long-term goal like retirement.
Secondly, dollar cost averaging typically results in higher annual returns than a one-time contribution of equal principal value (meaning: investing $100/month for twelve months will typically result in higher returns than investing $1200 at the beginning of a twelve-month period). By staggering your contributions throughout the year and taking advantage of dips in the market, you are increasing your likelihood of a higher rate of return over time. Even a small monthly investment can lead to excellent returns—you just have to have patience and the right timeline.
Utilizing dollar cost averaging in your investment strategy is just one of the ways you can preserve and grow your wealth over time. North Peace Savings is here to help with personalized advice that reflects your unique needs and goals, giving you the financial security and peace of mind you deserve.
Whether you’ve just landed your first job, started a family, or opened a new business, I can help you think through wise investment strategies for where your life is at today. Contact me to develop an investment strategy unique to your needs!