Hey everybody it's Molson Montgomery back again with another article on an idea that the average investor will find very beneficial. Lately, I have been answering a lot of questions on Reddit, and one of the common threads with younger investors or investors who have a small amount of income that is dedicated to investing is, how do I start investing for this monumental goal called Retirement? The thing about investing for retirement is that it’s like eating an elephant. And how do you eat an elephant? One bite at a time. In the investing world, taking one bite at a time is equivalent to dollar cost averaging.
What is dollar cost averaging?
When dollar cost averaging, Instead of putting a large sum of money into the market all at once, you make smaller investments on a weekly, biweekly, or monthly schedule.
What you trying to do is to capture as much of the market volatility (how the market rises and falls) as possible, without creating unnecessary risk. Many people watch the market anxiously when they are ready to invest, trying to buy when prices are at the lowest. The thing is, nobody can time the market, not even Warren Buffet. When you use dollar cost averaging to put money into the market, you’re no longer guessing if the price will go lower or higher before you buy. This allows you to get the best rate of return with little effort and risk. Dollar cost averaging also gives you peace of mind, because with this concept even when the market begins to fall, you can still get excited because your next scheduled investment will be able to buy more. Every dollar that goes into a falling market is being bought at a discount. If you keep that mindset, when a bear market or correction comes, you will have a better emotional reaction than people trying to time the market, and you’ll definitely sleep better at night.
The other big thing that dollar cost averaging does is it allows you to exist within your budget. A lot of my clients when they're first starting out with investments are concerned that they won't be able to save enough or put enough away for retirement. The mindset that I try to get my clients into is it's not about making giant leaps, it’s about creating the right budget to allow yourself to put something away, just something to move your investment needle. What we are doing is creating a habit and this habit will allow you to snowball your money. The interesting thing about making money is that to be truly successful doesn’t take discipline, it takes good habits. Once you form an investing habit, the rest falls into place, and that’s what Dollar Cost Averaging can do.
A lot of times we do dollar cost averaging without even knowing it, if you have an employer-sponsored RRSP with a matching program, you are already doing dollar cost averaging with your pay. Contributions will go in on a set schedule and you will build an investment portfolio without you even knowing. That's what you're looking for when it comes to creating a financial plan that will get you to the goals you want to achieve financially.
Investing in Retirement
There is something unique that I like to do with my clients, especially in retirement. I love to marry the cash wedge and dollar cost averaging strategies together in my client's financial plans. This protects them when a correction or bear market comes.
How does this work? When the market is high, we take some additional money out of their investments and put it into a cash account or money market fund. When the market is down, we utilize the cash wedge for potential income, and we begin to sprinkle that lump sum amount of money into the market on a weekly basis. This allows new money to begin investing in and around the bottom of the market, and be able to grow up through the market correction. Once you have moved through a correction, the assumption is that we now have a three-year bull market that will help you replenish your cash wedge. For more information on the cash wedges I've written an article about it so take a look and of course, if you have any questions please feel free to contact me anytime. I'm more than happy to answer anything.
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