Dollar Cost Averaging

Here is a financial planning tidbit to think about over the weekend - dollar cost averaging into an investment portfolio. Dollar cost averaging is an ideal method to build portfolios over time.

What is it?

Rather than make a lump sum investment purchase, dollar cost averaging involves the regular purchase of a small amount of an investment on a weekly, monthly, or quarterly basis.

Why does it work?

The theory is that, over time, financial markets fluctuate, and a fixed dollar amount will yield varying units of a security - such as a mutual fund. The result is that more of the security will be purchased when prices are low, while less of the security will be purchased when prices are high.

What are the advantages?

Three important advantages of dollar cost averaging are:

a) minimizing market timing concerns

b) eliminating concerns over investing possibly large lump sum amounts, and
c) disciplined savings.

How can you do it?

The strategy can be implemented easily by setting up a systematic investment plan that transfers funds from your bank account into your investment account on a regular basis.

An example involving an initial investment of $1,000 in the CI Portfolio Series Balanced Portfolio starting in November 1988 and subsequent contributions of $200 per month until August 2007. This modest start and contribution schedule would have resulted in a $104,000 portfolio value today. This method is quite conservative and the returns far outstripped inflation, Canada Savings Bonds, and 5 Year GIC returns.

I like dollar cost averaging because it eliminates a lot of the emotion from investment decisions and is very disciplined. Have a great weekend.