We recently came through what has become known as ďRRSP seasonĒ, a time where some people are looking to top up their RRSP prior to the deadline for claiming a tax deduction on last yearís income tax return.
During RRSP season there is always speculation about what to do with your investment. Is this a good time to buy long-term investments? Should a person play it safe? These kinds of questions.
With the volatility of the last couple of years, some people are nervous about putting money to work, in case the markets drop subsequent to their purchase. This is a normal, natural reaction, but unfortunately it can be counter-productive.
For the long-term buyer of investments, you actually want investments to decline in price. Thatís what gives you the opportunity to acquire more investments at cheap prices, and eventually reap the consequent rewards.
Fortunately for the long-term buyer of investments, I can tell you that sooner or later the markets will provide another stellar buying opportunity. I just canít tell when it will happen, or how cheap prices will get.
With all this in mind, I have got some good news. Iíve got a time-tested idea that takes the guesswork out of the decision-making, and gives you a simple, solid game plan to move closer to your financial objectives. The time to get started on your 2012 RRSP contribution is right now, with a dollar cost averaging strategy.
Dollar cost averaging is a bit of fancy tem, but donít let the jargon intimidate you. Itís actually a pretty simple idea. But itís also a very powerful idea, and itís an idea that all investors should be familiar with. Dollar cost averaging is truly a fabulous way for a person to accumulate wealth. Itís simple, and easy, and itís very effective.
Basically, dollar cost averaging means you invest a regular amount of money on a regular basis. That might be something as simple as putting $100 per month into your RRSP, but the specifics of this example arenít really that important. Just do the amount and the frequency that works for you.
One of the most common ways to implement the strategy is to have the investment happen automatically with a pre-authorized chequing plan, or through payroll deduction. This way you donít see it, and you probably wonít miss it.
One of the great things about dollar cost averaging is that it takes the guesswork out of when to invest. The best time to invest is when the markets are down. This is the ďbuy lowĒ part of ďbuy low, sell high.Ē
So how do we know when the markets are at the low point? Well, we can't know the future. Even with all of the time and energy I put into my work, I donít have a crystal ball that tells me what will happen tomorrow. The good news is that we donít need a crystal ball.
It really does not matter if the markets plunge in June or July or August or September, as long as you are buying in June and July and August and September. Whenever the markets dip, you are there - accumulating shares at bargain prices.
By capturing these times when the markets are down what you do is reduce the average cost that you pay per share. And, by paying less for your investments, you eventually end up making more money on your investments.
Another great reason to set up a regular investment plan is that there is a better
chance that you will stay on track with your investments if they are programmed to happen automatically. If you automatically invest $100 on the first of every month, you know it is going to happen.
On the other hand, if you wait until the end of the year and invest whatever is left over, there might not be very much left over. It is human nature to live up to your income level, and it is usually pretty easy to find a use for the money if it is just sitting in your bank account.
In fact, making regular investments automatically is so easy to do that many people have commented to me that they donít even notice the funds coming out of their account. When that happens, consider upping your monthly investment to a higher amount. You donít necessarily have to put in so much that it hurts, but when $100 per month becomes easy, bump it up to $150. If thatís still painless, ratchet it up to $250 per month. By the end of the year you can have some meaningful results.
Think of this as a financial fitness plan. The important thing here is that you just get started. So, like with a physical fitness plan, start with something manageable and increase your efforts as your financial muscles grow stronger.
The idea of saving large amounts of your income might seem daunting at first, but the actual difference in your standard of living if you save 10 percent of your income and live on the rest is not usually too much different than living on 100 percent of your income. In other words, rather than spending all your income today, if you live on 90 percent of your income and save ten percent for future needs, now you have a plan for the future without giving up too much today. But if you spend all your money now, what are you going to live on later?
Dollar cost averaging- just investing on a regular basis- is a premiere way to build wealth. It is simple and easy and it really, really works. Do not underestimate the power of dollar cost averaging because of the simplicity of automatic monthly investments.
If the dollar cost averaging concept is new to you, take a few minutes to sit down with an investment professional to review it. The time could very well be one of the best investments you make.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI.† Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at firstname.lastname@example.org†or www.bradbrainfinancial.com.