Use Dollar Cost Averaging to Avoid Market Timing

Everyone has heard buy low sell high but how do you actually do it? More often than not I worry that a low could get lower and a high is just the beginning. Trying to get market timing right is an art form that most people don’t have the time or resources to master. I avoid it by using dollar cost averaging – or by buying the same funds every week.

Dollar cost averaging is effective because you fewer units when the price is high and more when the price is low. For example if you invest $1000 every week and the fund price is $55 you would buy 18.2 shares. The next week if the price has fallen to $45 you would buy 22.2 shares. The example below shows that even when the price remains the same the fluctuations over six weeks let you reduce your cost per share.

A chart showing the benefit of Dollar Cost Averaging
How dollar cost averaging works

Even better it is easy. Since you are buying the same dollar amount of the same fund each week you can automate this process. By automating the process I now spend less time worried about when to invest and less time online banking. Best of all – it is automatic so I don’t need to think about it.

The benefits

  • You buy more when the price is low and less the price is high
  • Your average book cost will be lower than simple math would predict
  • You only need to set it up once
  • Once it is set up it is easier to just let the automatic investments to continue rather than stop saving and investing

Three steps to use dollar cost averaging

  1. Pick a stock or fund that you believe has good fundamentals and will rise
  2. Research your transaction fee – this strategy works best with no or very low fees
  3. Set up your weekly investment with your brokerage. Finding somewhere this is possible is essential – most people don’t need another task, especially every week.

How I set up dollar cost averaging – an example

Dollar cost averaging is one of my favourite investment strategies for all the reasons I outlined above. I have set up a portion of my automatic savings LINK to be automatically invested each week. Here is what I set up, in the hopes it helps but always evaluate the purchases for yourself as I am not a financial planner.

How I set up the investments

  • Opened an online TD Waterhouse investment account
  • Set up automatic savings LINK taken from my chequeing account the day after payday
  • Picked four TD e-series funds to invest in each week. Picked as they have fairly low MER LINK and can be bought and sold for free using a TD account
  • Called TD and set up automatic investments of $50-200 each week into the e-series funds I chose <- unfortunately you have to call TD to set it up
  • Semi-annually review of the balances and adjust the allocation if needed

Links and more resources

TD e-serise funds LINK have a number of options with fairly low MER and no cost to trade – this will eliminate the value of investing every week.

I plan on holding these funds for the long run so understanding and minimizing your MER is important.

I chose four funds to get greater diversification which over the last ten years has lead greater returns than the TSE.

This works best as a part automating paying bills and automatic saving.

If you aren’t sure what funds to buy get an idea from the Couch Potato Blog or a robo advisor like Wealth Simple and then set it up yourself.

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