Wondering what dollar-cost averaging is and if it\u2019s the right strategy for you? This is a question many new and seasoned investors ask when looking for ways to grow their money with minimal risk. By investing consistently over time with this strategy, you can reduce the impact of market ups and downs while focusing on long-term growth. Here\u2019s what you need to know about dollar-cost averaging.<\/p>
Dollar-cost averaging is an investing strategy that involves contributing a fixed amount to a fund or stock portfolio at regular time intervals, regardless of stock prices or market movements at any given time.<\/p>
When the prices of your chosen stocks or funds go up, your fixed investment will buy fewer shares. When prices go down, it nets you more shares and reduces your average cost per share over time.<\/p>
Often used with index funds like the S&P 500<\/a> or the Nasdaq Composite<\/a>, this strategy reduces the impact of market volatility and removes the need to time your purchases perfectly.<\/p> Let\u2019s say you decide to invest $1,000 in stock ABC on the first of every month for five months. Assume the following table indicates how the price of the stock moves in the first five months.<\/p>Dollar-cost averaging example<\/h3>
| Month<\/th> | ABC stock price<\/th> | Shares purchased<\/th> | Shares owned<\/th> | Value of investment<\/th><\/tr><\/thead> |
|---|---|---|---|---|
| January<\/td> | $20<\/td> | 50<\/td> | 50<\/td> | $1,000<\/td><\/tr> |
| February<\/td> | $18<\/td> | 55.55<\/td> | 105.55<\/td> | $1,899.90<\/td><\/tr> |
| March<\/td> | $21<\/td> | 47.62<\/td> | 153.17<\/td> | $3,216.57<\/td><\/tr> |
| April<\/td> | $19<\/td> | 52.63<\/td> | 205.8<\/td> | $3,910.20<\/td><\/tr> |
| May<\/td> | $22<\/td> | 45.45<\/td> | 251.25<\/td> | $5,527.50<\/td><\/tr><\/tbody><\/table> By May, a total investment of $5,000 ($1,000 X 5 months) is worth $5,527.50. Had you decided to invest that total at any one of those months, your investment might have ended up higher or lower.<\/p> In this case, the average price of the stock was $19.90 per share (total amount invested \/ total number of shares owned = average price per share), which is almost the same as the original purchase price, but it\u2019s lower than the stock\u2019s highest price.<\/p> By using a dollar-cost averaging strategy, you reduced the impact of volatility in the stock price over time.<\/p> How to use dollar-cost averaging<\/h3>One of the easiest ways to apply the dollar-cost averaging strategy is by setting up automatic contributions to a tax-free savings account (TFSA)<\/a> or registered retirement savings plan (RRSP).<\/a> Then, you can use the money to buy ETFs, index funds or individual stocks on a consistent schedule. Any growth in a TFSA is tax-free, while RRSP earnings are tax-deferred.<\/p> You can also use a stock trading account. Many brokerages, like Questrade or Qtrade Direct Investing, offer commission-free trades for stocks and ETFs, making it easier for you to get started. You can even set up automatic monthly investments, so you don\u2019t forget.<\/p>\n \n\n |