How Regular Investing Works For You

Whatever stage of life you are in,  committing yourself to a programme of regular investing can be an important and powerful way to help you reach  your goals. Many of us grew up learning how  important it was to put those extra  pennies, dimes and quarters away in  our piggy banks or savings accounts for a rainy day. Making savings a priority is something we can all  identify with. A regular investing programme takes a  regular savings programme and takes it  one step further. The approach takes  advantage of one of the only certainties on Wall Street or Bay   Street: that stock and bond prices  fluctuate. A regular investing  programme through a pre-authorised contribution plan (PAC) allows you to   dollar cost average into mutual fund  investments, potentially reducing the average price you pay for your units. Dollar cost averaging is a strategy of investing equal amounts of money  at regular intervals no matter what  the markets or the price of your specific investments are doing. As a   result, you are able to buy more units when prices are lower and fewer when prices are higher. It’s a simple and easy strategy.

How It Works
Let’s assume you are investing $100 every month. In the first month, the unit price is $10, which means you  can purchase 10 units with your $100.  The next month, the price has dropped to $6, allowing you to purchase 16.7 units. The following month the price  is $8, so your $100 buys you 12.5  units, and finally the price is $11, which means you will buy 9.1 units. This pattern will go on for as long  as you have your pre-authorised contribution plan in place. Over time, it’s this simple arithmetic and  discipline that works for you, and  means that your average cost of units is lower than the average price on  those same dates. It’s a systematic way of building for your retirement, your children’s’ education, or some other goal over time. While the general trend of the markets has been up over the long   term, it’s fair to say that there are no guarantees. That’s why dollar cost  averaging using a pre-authorised  contribution plan should be viewed as  a long-term strategy.

By investing regularly you won’t need to try timing the market. With dollar cost averaging, you know that you’re not putting your entire investment to work at a market top. Instead, you  are building your position bit by bit, letting time work for you. Even  if you have a substantial lump sum to invest, dollar cost averaging can be a strategy you might wish to employ. If you are concerned that the market  might be due for a downward correction, instead of waiting to invest, you can split your investment  up and average in over the course of  a few months. If the unit prices  decline, you buy more for your dollars. If it doesn’t, then the cost is that part of your money was out of  the market longer than it might have been had you invested all of it today. This can be a comforting  approach for many investors in today’s volatile markets.                                                                 

Starting Early
It can be hard sometimes to come up with large lump sums to invest. After  all, your money is often doing other  things. Many investors find it easier  to invest a relatively small amount every month. This can also allow you  to get started on your investments that much sooner. Time is the investors best friend and it’s never too late to get started. Even if you only have ten years until retirement, a PAC of just $500 a month can grow to $90,645 (assume an 8% rate of return, without considering taxes on investment income). Of course the earlier you start, the more you can accumulate. That same $500 a month, growing at 8% over 20 years instead of ten increases the amount at retirement to $286,334. A pre-authorised contribution plan into one or more mutual funds can   both help to make it easier to find the money to invest, and can also allow market volatility to work for you over time. (Scotiabank)