Dollar cost averaging is an investment strategy designed to reduce volatility in a portfolio by purchasing an investment in fixed increments, rather than all at once. We're all trying to buy low and sell high. By parceling out an investment purchase over time, say, over a year, you can decrease the chance of the opposite happening — buying an investment at the exact wrong moment — that is, buying high and watching it go lower.
With dollar cost averaging, if you invest a portion at that moment when the share price is particularly high, you’ll get fewer shares. But if the next time you buy, its price is considerably lower, you’ll get more shares for the same price. The idea underpinning the strategy is that by tiptoeing into the shallow end of an investment rather than cannonballing with all your money, you will decrease your chances of overpaying by purchasing the investment at an average price — not a particularly high or low one.
There’s a downside to this approach if you’re talking about a big chunk of money: by remaining on the sidelines, you run the real risk of missing out on growth should the investment’s share price soar. Though the little-bit-at-a-time method might provide some peace of mind for the nervous investor, the body of evidence on the topic suggests that you’re better off buying the investment all at once, because, historically, stocks spend more time going up than they do going down.
But if you’re not trying to invest, say, the money you inherited at the sad passing of great aunt Ruth, and instead you want to make sure to automatically invest a percentage of every paycheque, recurring investments give you the same peace of mind as DCA — and they make sure you’re consistently putting money in the market, setting yourself up for long-term growth.
If you’re wondering how to do that (and you don’t mind a little self-promotion) Wealthsimple has an easy new way to set up Recurring Investments. Just choose what you want to invest in — unlike most places, which restrict you to mutual funds, we let you also invest in ETFs, individual stocks, and even crypto. Choose your frequency (daily, semi-monthly, or monthly) and the amount you want to invest (it can be as low as $1, if you’re feeling veeeerrrry cautious), and we’ll take care of the rest.
