Dollar-cost averaging has two advantages: It turns saving into a habit and it keeps you from trying to time the market.
Bruce Sellery has the same thing for breakfast every morning: “Cottage cheese, yogurt and bran flakes,” he told me earlier this year. “I’ll probably eat that same breakfast for the rest of my life.”
Sellery writes about the value of habits in his latest book, The Moolala Guide to Rockin’ Your RRSP. “When I trimmed up and lost about 10 pounds 10 years ago, I changed some fundamental things about how I eat,” he said. “I reduced my carbs significantly and increased my protein at breakfast. I have had the same breakfast every single day since 2002.”
One of the best ways to keep on doing what’s good for you is to eliminate bad choices. In Sellery’s case, that’s a kitchen pantry full of croissants and pancake mix.
It’s a principle that applies well to money. I made one of the best financial decisions of my life 17 years ago. I arranged for a monthly deduction to be made from my bank account and for that money to be invested in a portfolio of mutual funds as part of a registered retirement savings plan (RRSP).
As a result, I have never rushed to make a contribution before the RRSP deadline. I have invested a predetermined amount every month since 1997. Over time, my salary has risen and so I’ve increased that monthly contribution accordingly. I can say without reservation that I’ve saved more as a result of this approach.
This isn’t just about saving, though. What I’m describing is referred to as dollar-cost averaging. Its real power lies in the fact that I’ve invested the same dollar amount each month. So when the value of the funds in my portfolio was up — as it was during the technology bubble in 1999 — my money bought fewer fund units. When their value was lower — think 2008 — I bought more.
It’s a deceptively simple idea. By committing to a dollar figure, and to regular saving, I have ignored market volatility. I’ve never timed the market. The truth is I really don’t think about it that much. The money has been coming out of my pay for so long that I don’t miss it.
This is not to suggest that we can ignore our retirement savings. It’s important to pay attention to your investments’ performance, rebalance your portfolio when necessary and have regular discussions with your financial advisor about how you’re tracking relative to your plan.
Sellery puts it this way: “I want you to be engaged and looking at the performance of your investments, for example,” he said. “But I don’t want you to have to think about how to make the contribution itself.”