Tag Archives: dollar cost averaging

Doing the RRSP Deadline Money Dump?

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It’s getting close to the end of the month RRSP deadline and lots of people are now thinking about doing their annual RRSP investment money dump.

But you shouldn’t do it. Not just because of the insanity of the market in the last few days: The Down was down 500 points or so Friday, down almost 1200 on Monday, then a 1000 point swing on Tuesday from opening down 500 to being up almost 600 at the close.

If you’re trying to time the market, you’ll never be successful. And if you’re just dumping money into your investments once a year, you’re also going to be disappointed over the next few decades.

THE best way to invest is dollar cost averaging. We’ve talked about it before, just search here for that term and you can read some of the research.   https://www.yourmoneybook.com/dollar-cost-averaging-your-investments/

Dollar cost averaging is putting the same amount of money into your investments each and every month. No matter what the market is doing, put your monthly amount into the same investments you’ve chosen. That way, you’re averaging out the market. Some months, when it’s down, you’ll get more mutual fund shares. Other months, when the market is up, you’ll get fewer – but it’ll average itself out over the years. In other words: Set it and forget it, because you’re not retiring this month, year, or decade.

Even in the great depression, someone who stuck with investing every month, all the way through the depression was way up a decade later, compared to someone who pulled out, then re-invested, and tried to predict the market. The once a month investor had doubled their money while still in the depression. The once-a-year investor took 25 years just to break even!

If you don’t have the money, it’s probably a great idea to skip the RRSP loan. Yes, you’ll be out some tax refund – but only for this year. Then, instead of a year of payments for last year, invest something each month taken directly out of your bank account starting this month. You’ll get the refund next year, you’ve started on the successful track of dollar cost averaging, and you’re not going in debt to time the market. A triple win with just one adjustment!

Oh, and you do know, or remember, that banks are for parking your money and not the place to do your investing, right?

Stock Market Meltdown? What Meltdown?

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Was I ever excited yesterday that there was a huge clearance sale on investments! And that sure came true. For the three days ending Monday, the markets dropped around 10%. But don’t panic:

Take a deep breath, don’t make panic decisions, and realize that a correction happens every 18 months or so. Since the last one was five years ago, this has been coming for over three years!

I manage a seven figure investment portfolio for a relative, so I have a LOT of skin in the game.  They are managed accounts where I don’t get involved at all with Hollis Wealth South Edmonton. Before the correction, the accounts were up 11% on average. They are conservative and do not have any individual stocks – because that is gambling. They dropped $54,000 in three days. But that only reduced then to their April 2015 levels. Yesterday, the market was way up and the accounts made back a ton of the previous drop.

The markets go down and they go up. Over a quarter, a year, or ten years, they’ll be up – just not as of Monday. Investing is a time horizon of five years or longer. So what on earth does it matter what one day or one month brings?

We tend to think what happened last week will go on forever. There are still people who have never invested again after the 2008 actual meltdown. The markets have quadrupled since then, and they’re in GICs. Conversely, when things go well, we tend to think that the good times will last forever, and that’s not true, either. There’s a great quote that more money is lost preparing for a correction than in an actual correction.

If you are saving for a down payment, a car, or whatever, your money should not and cannot be in the market. It needs to be in a boring no-return/no temporary loss savings account.

If you’re retired, or close to retirement, you do, or should, have a conservative portfolio. The markets dropped 10% but, in my case, the accounts didn’t go down by more than 4%. On the other hand, if you’re in your 20s, you should have good growth mutual funds and one week doesn’t matter because you won’t need the money for 40 more years!

The best way to invest is a little each month. Whether it’s $100 or $500. Make the contribution monthly no matter what the market is. On down months, you’ll get a lot more shares – on months when the market is up, you’ll get fewer shares. Go to yourmoneybook.com and search for dollar cost averaging with some incredible stats going back to the Great Depression of how that’s THE best way to invest.

Lastly, you need to be mindful that Canada is a resource rich country. But we’re also a tiny percent of the world economy. My investment accounts have almost no Canadian stuff in them – haven’t for 18 months – way before oil and the dollar plummeted. Canadian investments won’t come back for two years – if then…

Again: Take a deep breath and realize it’s temporary. If you think the free enterprise system is doomed and companies in the index that you hear about like Walmart, GE, Telus, etc. are all going to go under – then you can sell and get out. If not, just don’t open your statements for a couple of months and ignore the doom and gloom…

Keeping You Updated

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Things change pretty quickly in the world of finance, credit, money and investing. Here are some updates to things we talked about in the last few  months. You can always find the stories at yourmoneybook.com and click on the radio stories button:

A few months ago we talked about the changes for airlines and your frequent flyer miles. Well, Air Canada just did another round of cutbacks to what you’ll earn and an increase to what you’ll need to redeem. Remember to think of your reward miles like bananas. Use them up as they don’t increase in value over time! Oh, and Westjet and Air Canada now charge baggage fees – surprise! Did you think they’d just ignore the $30 to $50 million in profits that you’re now going to hand over forever?

If it makes you feel any better, the deep discount carriers in Europe and the US now charge for carryon luggage. With Spirit Air, you can pre-buy it online at $35 for a carryon. If you want until you get to the airport, it goes up to $50 and if you do it at the gate, it’s $100 for a carryon!  Oh, and you’re paying $10 to print your boarding pass.

Yikes, it’s offical: Costco is dumping American Express in Canada. You’re Amex card is no longer welcome starting January 1st. They’re now partnering with Capital One. What’s in my wallet? Not Capital One! But, it’s a good guess that they changed over for a whole lot more money from Capital One…But why go from Amex whose clients spend four times more than Visa clients to a card that targets credit challenged people? Makes no sense, even if their kick-back is way higher.

I just read two reports that show independent book stores are growing in numbers and volume of sales. Great news as I love independents. I don’t deal with Chapters – you won’t find my books with them. I’m the author of 17 books. 14 are only on my web site and three are ONLY available at a few independents, including Mosaic on Bernard. When I talk about shopping local, I actually give up a ton of sales to do so. Actions speak louder than words.

For the last month, the stock markets have gone a little nuts. Down 300 points in a day, up 200 the next. We keep talking about the dangers of buying one or two stocks. If you’ve done that, if you gambled like that, you’re probably down a ton of money. If you’ve invested in good growth mutual funds, you’re already up again. I manage a seven figure account for a relative and all the bad news last month still had a 2% return for the month with Dundee Wealth.

And if you’re a gambler, gold and silver are below 2010 prices. Bitcoin, which is an online currency is down 75% for the year. If you bet only on energy stocks, you probably lost over 40% of your money. Those one-off buys are not investing. They’re gambling – and on these and many others, it’s a big loss right now. Investing is a five year or longer time period with a mix of good growth mutual funds with a long track record. Investing is also buying a fixed amount each month. Set it and forget it.

Dollar Cost Averaging Your Investments

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As we head into year end, and the RRSP season, lots of people are going to make a one-time annual contribution. Others are scrambling to get an RRSP loan so they can have the tax receipt. Both of those give someone an instant pot of cash to invest. In the case of an RRSP loan it also makes sure that person really doesn’t have the money to contribute because they’re making payments on last years’ loan. Not a good idea. I’d rather have them not contribute for one year and start immediately on a monthly plan for next year, which is actual real money, and not borrowed.

But for both these examples, a ton of people will have one lump sum of money to invest.
While we normally do not talk about investments, there was a story a couple of weeks ago that was so powerful it is worth sharing and certainly timely. While I believe investing comes after becoming debt free, except the mortgage, many people are in that enviable position.

One of the Wall Street Journal writers recently went back to the great depression and figured out how an investor would have made out in a market that went down 89% from its peak.
He took an index fund of 500 companies and calculated the returns. Now the story we hear in the media is that an investor at the height of the market in 1929 would have taken until 1954 to get back to even. Sick story, and probably enough to keep most people out of investing.

But someone who dollar cost averaged did incredibly well in a bad market. Dollar cost averaging is taking the same amount of money and investing it each and every month. The months the market is up, that money just buys less shares. The months the market is down, it buys more shares. So over time, it rides the peaks and valleys of the market.
Now, someone who started investing $100 a month at the absolute height of the market in September 1929 would probably be a huge loser, right? Wrong. Starting the worst week in the stock market with the same investment every month, that person was already even again in 1933. Now remember, those who dumped their money in all at once took until 1954 to break even. By 1936, still in the depression, the dollar cost averaging person had doubled their money. And by 1954 when everyone else was just back to even, they were up ten fold!

The difference is that you either pick the 5th horse in the 7th race or you are betting every horse in every race. Which one do you think is the guaranteed winner?