The best way to save

Dollar-cost averaging reduces risk and adds up quickly.

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From the November 2013 issue of the magazine.

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Q: I’m currently saving $100 a month. Is it better to keep this money in my savings account and then make a single lump-sum contribution to the funds in my TFSA each year, or should I put it directly into the funds every month?

—Matt Girard, Richmond, B.C.

A: I used to believe in Santa Claus and timing the market. The harsh truth about the jolly bearded guy came when I was nine and he didn’t bring me a treehouse for Christmas. The harsh truth about the markets came much later—and it was a bigger and more painful blow.

If you can’t time the market, it is better to take advantage of a strategy called dollar-cost averaging. You invest the same amount of money every month to ensure you buy more units of your mutual fund when the prices are low, and fewer when they are high, reducing the average cost of the units. (You can make the whole process automatic by setting pre-authorized contributions to all your funds.)

There are other benefits to contributing that $100 to your mutual funds every month instead of hoarding cash for up to a year. Your money will be invested for a longer period of time and is likely to earn a higher rate of return than a savings account, maximizing the benefit of compounding. Plus you’ll have less temptation to spend the money on frivolous things because it will be hidden away inside your TFSA. These are nice gifts to receive, even if they don’t come nicely wrapped and placed in a stocking hanging from your fireplace.

Bruce Sellery is a frequent guest on financial television shows and author of Moolala. Do you have your own personal question? Write to Bruce at ask@moneysense.ca.

 

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