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Investing on a regular basis can boost your RRSP savings.
There are a couple of reasons why you would want to invest in your rrsp
on a monthly basis rather than wait until the end of the year. The first reason is obvious to everyone, a little
bit of pain monthly is better than a whole lotta pain all at once yearly.
There is a good investment reason why you would want to invest on a monthly basis that isn't so obvious. In the
industry, investing on a regular basis is called "dollar cost averaging". I don't know who invented that
term, or if they meant for it to be descriptive, but it doesn't really describe anything to me. "Investing
regularly" is more descriptive to me.
I am going to look at three scenarios, in each scenario we invest $100 monthly:
Scenario 1
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Scenario 2
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Scenario 3 Doesn't this look a little like the TSE recently? |
Which is the best investment? Intuitively the first one is the best,
followed by the second, followed by the third. If that's what you picked, you would be right if you had a lump
sum to invest, but completely wrong if you were investing regularly.
Let's look at the numbers.
Example a) Investment goes straight up;
Month |
Monthly Investment |
Unit Price |
Units Purchased |
January |
$100 |
$10.00 |
10.0000 |
February |
$100 |
$10.25 |
9.7561 |
March |
$100 |
$10.50 |
9.5238 |
April |
$100 |
$10.75 |
9.3023 |
May |
$100 |
$11.00 |
9.0909 |
June |
$100 |
$11.25 |
8.8889 |
July |
$100 |
$11.50 |
8.6957 |
August |
$100 |
$11.75 |
8.5106 |
September |
$100 |
$12.00 |
8.3333 |
October |
$100 |
$12.25 |
8.1633 |
November |
$100 |
$12.50 |
8.0000 |
December |
$100 |
$12.75 |
7.8431 |
Total |
$1,200 |
|
106.1081 |
Month |
Monthly Investment |
Unit Price |
Units Purchased |
January |
$100 |
$10.00 |
10.0000 |
February |
$100 |
$9.75 |
10.2564 |
March |
$100 |
$9.50 |
10.5263 |
April |
$100 |
$9.25 |
10.8108 |
May |
$100 |
$10.00 |
10.0000 |
June |
$100 |
$10.25 |
9.7561 |
July |
$100 |
$10.50 |
9.5238 |
August |
$100 |
$9.75 |
10.2564 |
September |
$100 |
$11.00 |
9.0909 |
October |
$100 |
$11.50 |
8.6957 |
November |
$100 |
$12.50 |
8.0000 |
December |
$100 |
$12.75 |
7.8431 |
Total |
$1,200 |
|
114.7596 |
Month |
Monthly Investment |
Unit Price |
Units Purchased |
January |
$100 |
$10.00 |
10.0000 |
February |
$100 |
$9.00 |
11.1111 |
March |
$100 |
$8.00 |
12.5000 |
April |
$100 |
$7.00 |
14.2857 |
May |
$100 |
$6.00 |
16.6667 |
June |
$100 |
$5.00 |
20.0000 |
July |
$100 |
$5.00 |
20.0000 |
August |
$100 |
$6.00 |
16.6667 |
September |
$100 |
$7.00 |
14.2857 |
October |
$100 |
$8.00 |
12.5000 |
November |
$100 |
$9.00 |
11.1111 |
December |
$100 |
$10.00 |
10.0000 |
Total |
$1,200 |
|
169.1270 |
The dollar cost averaging profits.
Scenario 1 | Scenario 2 | Scenario 3 |
$152.88 | $263.18 | $491.27 |
The investment that looked to be the worst was actually the best. Wouldn't
you agree that dollar cost averaging, or, simply investing regularly is a pretty good way to invest?