Details of Implementing Dollar Cost Averaging

[Kryptic]

I've read a lot about dollar cost averaging but I haven't found much information on the implementation details. Contributing monthly to RRSPs and TFSAs seems to be a popular strategy or maybe it's just used in the examples. So do you just pick a random day of the month and set up the automatic contribution for that day or are there advantages to picking a certain day of the month (e.g. 1st day of the month)? What happens if that day ends up on a weekend or holiday?

It seems that the higher the frequency of ones contributions the better and I've seen here that some contribute weekly or bi-weekly (perhaps this is due to pay schedules?) Is there a particular day of the week that's better (e.g. Monday or Friday)?

Do you automate this or do you just log in say every week and manually contribute?

When and how do you make your contributions?

Thanks.

[YYC27]

It's probably most convenient to set up a pre-auth contribution for the same days that you get paid. You don't have to think about it, you never really "see" the money, so it's less tempting to spend it, and you're contributing as frequently as you have money to contribute.

If you're contributing to an RRSP, having a copy of the pre-auth agreement would allow you to file a form with the CRA that will authorize your employer to reduce the amount they deduct from your pay, in recognition of the RRSP deduction you'll be able to take when you file your taxes.

[i6s1]

Yup. Payday. Every other Thursday for me.

[budfrogs]

I have my mutual fund purchases coming out the day I get paid.

Timing the market to the day of the week probably isn't reliable or worth the hassle. And letting money sit in your account until the next week to invest seems silly if you get paid every second week but want to invest every week. Just automate it to happen when you get paid. (If you pay is on a regularly schedule)

[dcaron9999]

If you're contributing to an RRSP, having a copy of the pre-auth agreement would allow you to file a form with the CRA that will authorize your employer to reduce the amount they deduct from your pay, in recognition of the RRSP deduction you'll be able to take when you file your taxes.

You are referring to the T1213 form (http://www.cra-arc.gc.ca/E/pbg/tf/t1213/).

It is a simple one pager that you fill in, join a statement copy of your contributions, and send to your employer payroll dept. The entire process takes about 3-4 weeks. It makes a lot of sense to do taht and have the money in your hands rather than having the CRA profiting from your money until you file your yearly tax forms.

[Kryptic]

It's probably most convenient to set up a pre-auth contribution for the same days that you get paid. You don't have to think about it, you never really "see" the money, so it's less tempting to spend it, and you're contributing as frequently as you have money to contribute.

If you're contributing to an RRSP, having a copy of the pre-auth agreement would allow you to file a form with the CRA that will authorize your employer to reduce the amount they deduct from your pay, in recognition of the RRSP deduction you'll be able to take when you file your taxes.

Right, not seeing it would help with not spending it :) So, like say you get paid every other Friday. Do you figure out all the days in the year (Aug 7, 21, .... Dec 24 since Dec 25 is a holiday) and then tell the financial institution (TD Waterhouse in my case) to transfer your Money on those days?

I'll definitely look into this form with the CRA later as it would be nice to not have to wait for the refund.

[Kryptic]

You are referring to the T1213 form (http://www.cra-arc.gc.ca/E/pbg/tf/t1213/).

It is a simple one pager that you fill in, join a statement copy of your contributions, and send to your employer payroll dept. The entire process takes about 3-4 weeks. It makes a lot of sense to do taht and have the money in your hands rather than having the CRA profiting from your money until you file your yearly tax forms.

Thanks for the form. Do you submit that just before ever tax year or can you do it in the middle of the year when you've already made some contributions?

[BTron]

If you're at all interested in the effort, you'll get about a 1% better return historically/mathematically if you value average instead. This entails ensuring your investment appreciates a set amount per month, rather than contributing a set amount. So if $1000 is your target and the value of your funds goes up $500, you only contribute $500, but if your funds decline $500, you contribute $1500. Look into it.

[Wing Nut]

Don't DCA weekly. If you're buying funds you need the larger amounts for proper diversification.

[DanielCarrera]

I've read a lot about dollar cost averaging but I haven't found much information on the implementation details.

There aren't a lot of "details". You just put a fixed amount of money the same day every month.


Contributing monthly to RRSPs and TFSAs seems to be a popular strategy or maybe it's just used in the examples.

RRSPs and TFSAs are tax-deferred, and so they are preferable avenues for investing in general (an exception being Canadian stocks that pay good dividends).


So do you just pick a random day of the month and set up the automatic contribution for that day or are there advantages to picking a certain day of the month (e.g. 1st day of the month)?

Just pick your favourite number. I like prime numbers. If you want to get really picky mathematically, the best time to invest is the day after you get paid. That minimizes the amount of time your money is out of the market. But this is nit-picky.

What happens if that day ends up on a weekend or holiday?

Then the transfer happens on the next business day.


It seems that the higher the frequency of ones contributions the better and I've seen here that some contribute weekly or bi-weekly (perhaps this is due to pay schedules?) Is there a particular day of the week that's better (e.g. Monday or Friday)?

The best time to invest is when you have the money. Having cash sitting in a bank account is losing you money to inflation instead of earning you money through dividends and capital gains. Therefore, you'll get the best results if your contribution schedule matches your income schedule. If you get paid bi-weekly, invest bi-weekly. I you get paid monthly, invest monthly.

A lot of people think that bi-weekly gives better results, but that's people who are bad at math (which, unfortunately, is a lot of people, including a lot of financial advisers).

Do you automate this or do you just log in say every week and manually contribute?

Automate it. It's easier that way.

[DanielCarrera]

it's probably most convenient to set up a pre-auth contribution for the same days that you get paid. You don't have to think about it, you never really "see" the money, so it's less tempting to spend it, and you're contributing as frequently as you have money to contribute.

+1

[DanielCarrera]

Don't DCA weekly. If you're buying funds you need the larger amounts for proper diversification.

Huh? Just put your money in a few diversified index funds and you'll get all the diversification you need. Just divide your money into four funds: Canadian Bond Index, Canadian Equity Index, US Equity Index and International Equity Index. Pretty simple actually. You can get index funds from TD Bank, CIBC, ING Direct and other places.

[aidan24]

For those of you who invest your RRSP in stocks on a regular basis, how often do you purchase them.

For me, it didn't make sense to take the trading fee hit every 2 weeks, so I have the pre-auth withdrawal go to my cash optimizer account on scotia itrade and then every 2 months, i make stock purchases.

[brunes]

Don't DCA weekly. If you're buying funds you need the larger amounts for proper diversification.

This comment makes no sense....

I wouldn't DCA weekly, but for the sole reason that you are very likely never going to see any benefit from the hassle.

Monthly is fine, even bi-weekly would have questionable benefits over the long haul.

[Wing Nut]

This comment makes no sense....

I wouldn't DCA weekly, but for the sole reason that you are very likely never going to see any benefit from the hassle.

Monthly is fine, even bi-weekly would have questionable benefits over the long haul.

Let me clarify. Let's say your portfolio has five mutual funds, for example, and you're DCAing $300 a month. Maybe one of those is a high-risk fund into which you're putting 10% ($30). If you split that up weekly that's $75 a month. You can't stick to your asset allocation in this example. I say that doing it monthly with the larger amounts is better because it allows you to get a proper asset allocation. If you're one fund, ETF or stock, then weekly is better, but most people here are not doing that.

To Daniel: TFSAs are not tax deferred.

[BTron]

If you actually already have the lump sum, yes, statistically you'll do better dropping it all in the market right now because the market trends up. However, most of us are DCA'ing out of neccessity, putting in the largest "lump sum" as soon as we have it available from our paycheques every two weeks. The only way around this would be to take out a loan and put it all in now and pay it off each paycheque, but you'd have to be betting that your return is greater than the interest, it's riskier, and it gives people without discipline an excuse to really screw things up.

I fully agree with the idea of automating it. My employer of the last three years is switching GRSP plans and without paying any attention to the 6% I have deducted every paycheck into three diversified funds, being forced to look at it now it's like "hey, look at all the money I paid myself without noticing! Woot!"