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Dollar-Cost Averaging
 
Trying to "time" or "beat" the markets can be temping, but it rarely works (and could backfire badly). Investing is most productive - and less volatile - when done over the long term. After all, in a long race, the tortoise invariably beats the hare. Rather than trying to time the markets, consider the more conservative and dependable strategy known as "dollar-cost averaging."

Dollar-cost averaging involves investing a fixed dollar amount at regular intervals scheduled on a weekly or monthly basis. Because market prices are continuously fluctuating, your individual transactions will buy more shares when markets are low and fewer shares when markets are high. The result is that the average share price falls as time passes and more and more shares are accumulated.

By following this strategy, you may also reduce the risk associated with investing a large amount in a single investment at the wrong time. Instead, it's like waiting until something goes on sale and then buying.
 
Example:

Consider if your budget allowed you to invest $200 per month for six months in an investment while prices moved up and down as shown below under "Unit Price."
 
Month Unit
Price
Units
Bought
Amount
Invested
Total
Value
1 $15.00 13.33 $200.00 $200.00
2 $13.00 15.38 $200.00 $373.23
3 $14.00 14.29 $200.00 $602.00
4 $12.00 16.67 $200.00 $716.04
5 $16.00 12.50 $200.00 $1154.72
6 $15.00 13.33 $200.00 $1282.50
 
Total
Months
Avg.
Cost/
Unit
Total
Units
Bought
Total
Invested
Total
Value
6 $14.03 85.50 $1200.00 $1282.50
 
Notice that your average cost per unit is lower than the average price of the fund. And the $1200 you invested over the six-month period is now worth $1282.50, a gain of 6.9 per cent. If you had invested your total of $1200 in month one, you would still have only $1200 at month six because the price returned to your original $15 purchase price (providing, in the meantime, no dividends were paid by the fund and re-invested). This is a clear demonstration of how dollar-cost averaging can lower your average price and increase the number of units you can purchase.
 
Markets are always changing
 
The following charts illustrate how dollar-cost averaging performs under different markets conditions.
 
In an smoothly climbing market, the unit price rises steadily over the investment term, never falling below the initial cost per unit. With dollar-cost averaging, the investor buy more units at the lower prices and fewer units at the higher prices.
   
The unit cost fluctuates as it rises over the term of the investment, enabling the investor to purchase units at various price points, instead of just one price. Due to a combination of dollar-cost averaging and the rising market, the units are worth more at the end of the investment period than when first purchased, allowing for a healthy profit.
 
In the first half of the investment term, the market decreases and so does the unit price; in the second half of the investment term, the market and unit price both rebound back to their original levels. Due to dollar-cost averaging, the investor is able to purchase more units at a lower cost than if a large lump sum had been invested at one time when the unit price was high.
 
Benefits of Dollar Cost Averaging
 
  • You don't have to guess when to buy, and you might be able to sleep better at night.
  • You don't have to invest a large amount all at once; smaller amounts are easier to work into your budget.
  • There is no need to study trends or be a market expert - professional money management is what the mutual fund provides.
  • Most importantly, dollar-cost averaging eliminates the temptation to buy wildly when the price is increasing and stop buying when the price is going down.
 
A disciplined investment strategy
 
Dollar-cost averaging imposes discipline because you keep investing the same amount every week or month, no matter what happens in the market. It helps you overcome the temptation to stay out of the market when conditions are uncertain, which can cause you to miss out on a market rebound. In fact, dollar-cost averaging works best in volatile markets.

Dollar-cost averaging follows the classic advice of "Buy low and sell high." It's a great way to begin a regular investment plan, and it can be very productive in the long run.

 

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