Skip to main content
personal finance

Playing the violin.Furtseff/Getty Images/iStockphoto

Once a week, like clockwork, Halifax couple Jeremy VanSlyke and his wife Carrie have 15 per cent of their income deposited into their investment accounts.

The actual figure varies from month to month, depending on how much income the 28-year-olds earn in their freelance music careers (he's a producer, she teaches violin). Still, the percentage is the same.

"Neither of us has any other kind of pension or retirement plan through work, so we have to take responsibility for that ourselves," Mr. VanSlyke says.

The investments are made automatically in a tax-free savings account and a registered retirement savings account, both with robo-adviser Wealthsimple. Mr. VanSlyke likes the online investing platform because it shows the potential compound returns when they retire decades down the road, if they keep up the regular contributions.

Their strategy is known as dollar-cost averaging, where you invest a set amount of money at regular intervals over a long time period. With dollar-cost averaging you buy fewer shares or units of an investment when it's up, and more when it's down, but the idea is that it averages out over time as the market fluctuates. The goal is to be more disciplined with your investing and benefit from compound returns over time.

"Even just a little bit now ends up being a lot later," Mr. VanSlyke says. "And it doesn't hurt that bad because it's a fairly small percentage."

Mr. VanSlyke first learned about the investing strategy while working summer jobs at TD Bank. He saw clients with modest incomes who built up a big retirement nest egg over a few decades.

"They had invested diligently over a lengthy period of time and amassed quite a bit of wealth," he says.

Marcelo Taboada, an associate at Montreal-based wealth management firm Tulett, Matthews & Associates, says dollar-cost averaging not only helps investors stay disciplined but also avoid the temptation to try to time the market.

"Forecasting is a dangerous game. Nobody really knows what's going to happen," he says.

Examples of those kinds of surprises are the Brexit vote last summer, or the U.S. election in November, when the markets dropped dramatically then quickly rebounded, catching many investors off guard.

Dollar-cost averaging also protects investors from falling into some typical behavioural traps, such as panic selling when markets drop or getting excited and buying more stocks when markets are up.

"When you do dollar-cost averaging you're shunning the behavioural stuff," Mr. Taboada says. "You have the benefit of deploying your money constantly without looking at whether the market is too high or too low."

He believes the strategy is especially good for millennials who may have small sums to invest today, but the most to gain from compound returns over the long term.

"The best asset a millennial has today is the time horizon," Mr. Taboada says.

Take the example of a 25-year-old who invests $200 a month for 40 years. With a 5-per-cent annual return, they'll have $398,916 at age 65. Compare that with a 40-year-old who invests $200 a month until they're age 65. That shorter investment period means that, with a 5-per-cent annual return, they'll have $96,374.

Even making a larger investment at a later age isn't always enough to make up lost ground. Someone who invests $36,000 at age 40, for example, (instead of $200 a month for 15 years starting at age 25), will have $121,909 at age 65, again based on a 5-per-cent annual return.

Mr. Taboada doesn't always recommend dollar-cost averaging though, including when someone receives a lump sum of money as a gift or an inheritance.

"My opinion is that you should invest it right away, if it's your intention to invest it," Mr. Taboada says, again pointing to the potential of compound returns.

Where many investors err is falling off the dollar-cost averaging wagon, which can happen if the markets go up quickly, or drop just as fast.

"Like any plan, it's only good if you stick to it," Mr. Taboada says. "If you stop the plan because the market is too high or too low and you don't want to lose, that's a problem. … The power of compounding is strong, but takes time, discipline, and consistency."

Mr. VanSlyke says he and his wife will keep using the dollar-cost averaging strategy, even as they continue to pay down their mortgage and get ready to have their first child later this year.

"The alternative would be not to do anything and procrastinate. That's not a good situation," says Mr. VanSlyke. "The other alternative is to throw money into it willy-nilly, like when you get a tax refund. That's a disorganized way of going about it. [Dollar-cost averaging] seems more methodical and, this way, I know we are going to be fine."

The Globe's personal finance editor Roma Luciw explains what a robo-adviser is and how they help young people with investing.

Globe and Mail Update

Report an error

Editorial code of conduct