In my latest podcast, I addressed a common question from both readers and clients:
“If I have a large sum of cash to invest, is it better to put it into the market all at once, or invest it gradually to take advantage of dollar cost averaging?”
Dollar-cost averaging, or DCA, is a strategy for investing gradually, with the goal of spreading out your risk and allowing you to take advantage of volatility. Many people seem to take it for granted that dollar-cost averaging has almost magical properties—that it reduces risk and leads to higher returns. In fact, while DCA can be a useful strategy, it’s often overrated—or at least misunderstood. So let’s consider when it might be appropriate, and what to expect if you use the strategy.
The two flavours of DCA
The first thing we need to clarify is that the term dollar-cost averaging can be applied to two quite different strategies.
The first is related to making regular contributions of new money, the way many people do with workplace savings plans. You might have $500 from every paycheque go into your group RRSP,