Dollar Cost Averaging: A Savvy Strategy to Navigate Market Volatility

Dollar cost averaging (DCA) is a proven investment strategy that can help you minimizing risk of market volatility. Over time, DCA can lower your investment costs and increase your returns.

What Is Dollar Cost Averaging?

Dollar cost averaging is a strategy for managing price risk when buying stocks, exchange-traded funds (ETFs), or mutual funds. Instead of purchasing all your shares at once, DCA involves buying smaller amounts at regular intervals, regardless of the price. This approach spreads out your investments over time, reducing the risk of buying at a peak.

By spreading your purchases, you decrease the chance of paying too much before market prices drop. This method also allows your money to consistently work for you, which is vital for long-term investment growth. If you participate in a workplace retirement plan, such as a 401(k), you’re likely already using dollar cost averaging.

How Does Dollar Cost Averaging Work?

DCA takes the emotion out of investing by having you buy the same small amount of an asset regularly. This strategy results in purchasing fewer shares when prices are high and more when prices are low.

For example, if you plan to invest $1,200 in a mutual fund this year, you have two choices: invest the entire amount at once or spread it out by investing $100 each month. By spreading your investment, you could end up with more shares at a lower average price, giving your portfolio a boost over time.

At AJ Wealth Management, we provide guidance on investment strategies that suit your need and short/long-term financial goals, ensuring that your investments are well-positioned for long-term growth.

Market Timing vs. Dollar Cost Averaging

Dollar cost averaging works because, over the long term, asset prices generally rise. However, prices often fluctuate in the short term, making market timing a risky approach. Many have tried to time the market, only to find that predicting short-term movements is nearly impossible—even for professional investors.

When you attempt to time the market, you risk buying at a high price, missing out on potential gains. By contrast, DCA allows you to invest consistently, avoiding the pitfalls of trying to predict market movements.

Dollar Cost Averaging for Smaller Investments

Dollar cost averaging is particularly beneficial for those who don’t have a large sum to invest at once. This strategy allows you to begin investing with smaller amounts of money, ensuring that you don’t have to wait until you’ve saved up a significant amount to enter the market.

Regular investments also mean that you continue to invest even during market downturns, which is crucial for capturing future growth.

Does Dollar Cost Averaging Really Work?

DCA offers significant benefits, especially for those who might be hesitant to invest a large amount at once. Research shows that while lump sum investing often leads to slightly higher returns, DCA still results in substantial investment growth.

Additionally, DCA can outperform lump sum investing in certain market conditions, reducing the risk of investing all your money at a market peak. AJ Wealth Management can help you determine if DCA is the right strategy for you, balancing potential returns with your comfort level and investment timeline.

Who Should Use Dollar Cost Averaging?

Consider using dollar cost averaging if you’re:

• Just beginning to invest and only have smaller amounts to work with.

• Not interested in the extensive research that market timing requires.

• Making regular contributions to investment accounts like RRSP / RESP / TFSA.

If you have a large sum to invest, prefer trying to time the market, or are investing for the short term, a different strategy might be more suitable. AJ Wealth Management can help you evaluate your options and develop a tailored investment strategy that fits your financial situation and goals.

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