As we’ve seen recently, there are always months when the market performs better, or worse, than others. A smart investment strategy is to use “dollar cost averaging” to spread your savings—and your risk—throughout the year.
You simply set up a Pre-Authorized Chequing Agreement (PAC) to automatically invest a consistent amount monthly, semi-monthly or weekly. When fund prices are lower, your PAC buys more units per month. When they’re higher, you purchase fewer units, but overall, the strategy may smooth out your average cost per unit.
You’re not at the mercy of the market at a single point in time.
This is especially important for dentists who make one large RRSP contribution at the beginning of the year. This chart illustrates the advantage of investing monthly versus making a yearly lump sum purchase.
How Dollar Cost Averaging Works
Month |
Amount Invested |
Unit Price |
No. of Units Purchased |
January |
$2,000 |
$12 |
167 |
February |
$2,000 |
$15 |
133 |
March |
$2,000 |
$14 |
143 |
April |
$2,000 |
$12 |
167 |
May |
$2,000 |
$10 |
200 |
June |
$2,000 |
$9 |
222 |
July |
$2,000 |
$9 |
222 |
August |
$2,000 |
$10 |
200 |
September |
$2,000 |
$9 |
222 |
October |
$2,000 |
$9 |
222 |
November |
$2,000 |
$10 |
200 |
December |
$2,000 |
$10 |
200 |
Total: 2,298 |
Total investment: $24,000
Total units purchased: 2,298
One time investment of $24,000 at $15/unit
Total units purchased: 1,600
Additional Advantages
- Benefit from monthly compounding: When you contribute through a PAC, your money starts to work for you the moment you invest, earning interest, dividends, or investment growth, which compounds as the year progresses.
- Maintain discipline: Despite our best intentions, we don’t always save as much as we intend to. The advantage of a PAC is that you don’t have to take the initiative to invest, it happens automatically.
- Get an additional tax advantage: If you earn or pay yourself a salary, you can set up regular payments to an RRSP account through your business payroll and have deductions made at source. That way, you can realize the tax benefits of your contributions up-front by having less income tax deducted at source, rather than having to wait until you file your income tax return.
Dollar cost averaging can be used for any savings plan including an RRSP, RESP, TFSA or non-registered account. No matter how much you save, the evidence is clear that it’s beneficial to do it in bite-sized contributions rather than lump sums.
Are you ready to use scheduled saving to spread your investment risk? Get started with this PAC Agreement. Please call 1.800.561.9401 for assistance.