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Contact Doug Hudson

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:

  1. one where the investment goes up steadily, month after month, starting at $10.00 per unit and ending up at $12.75;
  2. one where the investment goes up, and down, up and down, starting at $10.00 per unit and ending at $12.75; and lastly
  3. a horrible investment that starts at $10.00, goes steadily down until it hits a bottom of $5.00, then slowly works it's way back up to $10.00, the original price.

Scenario 1

this investment goes straight up

Scenario 2

this investment goes up and down, much like the markets normally does

Scenario 3

this investment drops drastically then goes back to where it started - which the markets do occasionally

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


Market Price = Total Units x Most Recent Price
= $12.75 times 106.1081 = $1,352.88

Profit = Market Price - Cost
= $1,352.88 - $1,200 = $152.88

Example b) Investment goes up and down, up and down, much like the market
does in reality;

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



Market Price = Total Units x Most Recent Price
= $12.75 times 114.7596 = $1,463.18

Profit = Market Price - Cost
= $1,463.18 - $1,200 = $263.18

Example c) investment starts at $10 drops to $5 then goes back up to $10,
like when the market crashes.

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


Market Price = Total Units x Most Recent Price
$1,691.27

Market Price = Total Units x Most Recent Price
= $10.00 times 169.1270 = $1,691.27

Profit = Market Price - Cost
= $1,691.27 - $1,200 = $491.27

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?