Dollar-cost averaging (DCA) is a simple but effective investment strategy that works through every type of market – and can be especially rewarding during volatile markets. With DCA, you invest a certain amount at regular intervals, say monthly. Over time, your investment builds up, one small but manageable step at a time. What’s more, you lower the average purchase price of your investments – buying more when prices are down, and buying less when prices are up.
The discipline: Regular investing
Regular investing is a simple concept, but can help you build wealth over time with discipline, consistency and compounding (see chart below). You contribute at specific intervals that are convenient for you, such as weekly, bi-weekly, semi-monthly or monthly. Ideally, the contribution amount is manageable and sustainable, and comes automatically from your bank account.
The great thing? Regular investing is a “set-it-and-forget-it” strategy that makes it easier to build wealth. It reduces the need to make often-difficult decisions on whether to spend for today or invest for tomorrow. It helps ensure contributions are always made – and that is the number one reason why it helps build wealth.
The strategy: DCA
By investing regularly, you can take advantage of a potentially powerful strategy: DCA. When markets are down and prices are lower, you buy more investments and/or units with the same regular investment amount. When markets are going up, your existing investments benefit from that performance by rising in value. At the same time, as markets rise, you buy fewer investments at the higher prices. Over time, you can potentially reduce the average purchase price of your investments, helping to enhance your long-term return potential.
Consider the following scenario:
- You have $25,000 to invest.
- You invest $2,500 each month for 10 months.
- Your investment declines 20% over the first two months.
- Your investment increases by 15% over the following eight months.
Source: RBC Global Asset Management. For illustrative purposes only. Note: In this example, we assume that markets are 8% lower at the end of the 10-month period than they were at the start.
As you can see from the chart above:
- At the start, you purchase 250 investment units with your monthly $2,500 contribution.
- As the price dips, you acquire larger number of units each month with that same dollar contribution.
- At the end of 10 months, you have more units than if prices had remained flat, which should ultimately benefit you over the long term as markets recover higher.
A powerful combination
The path to your goals can sometimes seem long and unattainable. But the combination of DCA and regular investing can help you build towards your long-term goals one manageable step at a time. It helps you take advantage of discipline and patience – and the market’s own volatility – to build wealth and achieve your goals over time.
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