A closer look at dollar cost averaging
Dollar-cost averaging happens when you invest regular, small amounts of money in an asset (stock or bond), rather than putting in a large lump sum. As the asset price fluctuates, your regular contribution buys different amounts of the asset.
The chart below shows how unit values move up and down over two years. Let’s assume an investor contributes $100 per month for two years. Take a look at the numbers to see how dollar-cost averaging evens out the highs and lows of investing in the market.
In this hypothetical situation, the investor will make $411 on the contributions of $2,400 – a healthy 8.6 per cent annual return over two years. Footnote *
- Average unit price: $17.25
- Total units purchased: 140.55
- Total value of units at the end of two years: $2,811
- Total dollar amount invested after two years: $2,400
- Total return to the investor: $411
The bottom line is, dollar-cost averaging is typically one of the easiest and most effective ways to build wealth over time.
- Footnote *
- * The returns listed are for illustrative purposes only. Actual results will vary.