Dollar-cost averaging: investing a fixed amount every month
Dollar-cost averaging means investing the same dollar amount at regular intervals – say $250 on the 15th of every month – no matter what the market is doing. You automatically buy more units when prices are low and fewer when they are high.
How it works
Most people already do this without the label: a monthly transfer from each pay into an RRSP or TFSA, invested in the same fund every time. Because the dollar amount is fixed, the number of units you get changes with the price.
A worked example
You invest $240 a month for six months in a fund whose unit price moves around:
| Month | Unit price | Units bought ($240 ÷ price) |
|---|---|---|
| 1 | $10 | 24 |
| 2 | $8 | 30 |
| 3 | $5 | 48 |
| 4 | $8 | 30 |
| 5 | $10 | 24 |
| 6 | $12 | 20 |
| Total | 176 |
- Total invested: 6 × $240 = $1,440
- Your average cost per unit: $1,440 ÷ 176 units = $8.18
- Average of the six prices: ($10 + $8 + $5 + $8 + $10 + $12) ÷ 6 = $53 ÷ 6 = $8.83
- Value at the end: 176 × $12 = $2,112
Your average cost ($8.18) is below the average price ($8.83) because the $240 bought 48 units in the cheap month and only 20 in the dear one. This always happens when you invest a fixed dollar amount and prices vary: the average cost per unit is never higher than the average price.
Not a guarantee. A lower average cost does not mean you make money. If the price had ended at $6 instead of $12, your 176 units would be worth $1,056 – a loss on your $1,440. DCA smooths your entry price; it does not protect you from a falling market.
Lump sum vs dollar-cost averaging
If you already have a large sum – an inheritance, a bonus, a pension transfer – should you invest it all at once or spread it out?
Vanguard looked at this in a 2023 study using market data from 1976 to 2022. Investing the lump sum right away beat spreading it out about two-thirds of the time (68% for a global stock index, measured after one year), with similar results in Canada, the US, the UK, Australia and Europe. The reason is simple: markets rose more often than they fell, so money waiting in cash usually missed some growth. Spreading the money out still beat leaving it all in cash about 69% of the time.
So the math usually favours investing right away. But a third of the time it doesn't, and losing a large sum the month after you invest it can hurt enough to make some people quit investing altogether. Vanguard suggests that people who strongly dislike losses can reasonably spread a lump sum over a short period, such as three months, rather than a year or more.
For most people the question doesn't arise: they invest from each paycheque because that is when they have the money. That is not market timing – it is just investing as soon as you can.
Setting up pre-authorized contributions
Banks, credit unions, fund companies, brokers and robo-advisors all offer pre-authorized contributions (PACs): an automatic transfer from your chequing account into your RRSP, TFSA or FHSA on a set date.
- Pick a date just after payday so the money is there.
- Check whether the cash is invested automatically or just deposited. In a self-directed brokerage account you may have to buy the ETF yourself each month, and commissions can make very small purchases expensive.
- Make sure contributions stay within your limit (see RRSP contribution limits and TFSA).
- Raise the amount each time you get a raise.
- Regular RRSP contributions can also cut the tax deducted from your pay. If you contribute through your bank or broker, ask the CRA for a letter of authority with Form T1213 (renewed each year) and give it to your employer. If your employer already deducts RRSP contributions from your pay, no letter is needed.
The behaviour benefit
The biggest advantage of regular investing is not mathematical. It removes decisions:
- No market timing. You don't have to guess whether now is a good time.
- Falls feel different. When prices drop, your next contribution buys more units, which makes it easier to keep going instead of selling.
- No last-minute rush. Spreading RRSP contributions over the year beats scraping together a lump sum before the deadline – and the money is invested months earlier.
- Habit. Money that leaves your account automatically is money you won't spend.