How To Dollar-Cost Average Out of a HISA into a Diversified Portfolio

Popular risk-mitigating strategy 'helps people sleep better at night'

After two years of stashing cash in the relatively safe confines of a high-interest savings account (HISA), moving your money back into the market can seem like an emotional undertaking.

Canadians, nervous about the economy's direction in 2022, moved assets into these accounts to avoid any potential ups and downs. Many still worry about recessions and market volatility, even though inflation and rates are moderating.

“High-interest savings accounts offered investors a safe harbour," says Lee Bowes, portfolio manager with IPC Private Wealth. “Some clients didn't want to deal with that stress."

However, with interest rates projected to fall further after June's 0.25% cut, which would cause the interest paid out from HISAs to decline, he explains that now may be the ideal time to put at least some of those savings back into the market.

"...this strategy will allow you to buy more shares when prices are low, which could help increase the value of your portfolio as market prices increase."

Slowly but Surely

If you are one of the many investors who want to take a more cautious approach to investing in equities again, consider dollar-cost averaging (DCA). It's a popular financial strategy where, instead of moving everything into a market-based portfolio at once, you divide your investment dollars into smaller amounts and then invest them automatically and at regular intervals over a longer period. It's typically used to move money from a savings or chequing account into an investment account, but it can also be used to move money from a HISA into a diversified portfolio.

Say you have $60,000 in your HISA. With dollar-cost averaging, you might move $10,000 into a balanced fund of stocks and bonds monthly for six months. Even if markets fall the day after you invest, you're only putting part of your money at risk. At the same time, this strategy will allow you to buy more shares when prices are low, which could help increase the value of your portfolio as market prices increase.

“Dollar-cost averaging is what we consider the head-on-the-pillow approach," Bowes says. “It helps people sleep better at night."

“It's not really about returns, it's about removing emotion from the process,"

Sticking to the Schedule

Some research does suggest that investing all your HISA money into equities at once might be more profitable over time, but there's a reason Bowes recommends DCA to certain clients.

“It's not really about returns, it's about removing emotion from the process," he says. “We're not going to try to time the market because we're probably going to get it wrong. Instead, we're going to build a diversified portfolio by investing in stages."

At the same time, the automatic movement of money ensures that you are investing instead of keeping that money in your HISA because you either forgot to move it or got nervous about investing one month.

The process typically involves setting the timeline for when each instalment (or tranche) will be invested, says Bowes. You'll want to choose that schedule with your advisor. Whatever you do should align with risk tolerance levels and your ability to reach your financial plans.

You also don't need to divide up your payments evenly. Bowes has recommended investing a larger portion of funds, say 60%, at one time and then transferring 20% in months two and three. That way, you get some benefits of investing a large amount at once - as long as the market climbs from there - and some of the benefits of DCA.

Whatever you do, it's important to stick to your investment schedule no matter what the market does. “I tell my clients, 'Listen, if the markets fall before we allocate a tranche, that's great, you're going to be better off. But if the markets go up dramatically, we're not going to change our minds. Once you've made the decision, you have to stick with it."

“Once you nail down the details," he adds, “you basically calendarize it and then follow the investment schedule unemotionally. Your advisor should keep you updated as each tranche is used until you're fully invested."

Keeping Your Bases Covered

Bowes recommends liquidating portions of your HISA over time so that your money works for you in the markets rather than sitting in an account that could ultimately pay less as rates fall. However, there may still be reasons to keep some money in a HISA - maybe you want to take a vacation or buy a new car in a year and don't want to put that money at risk. Otherwise, you'll need to be in the market to meet your long-term goals.

“It's better to be invested," he says. “If your time horizons are long enough, you'll be fine. If your time horizons are very short, then dollar-cost averaging may be an even better choice, but you'll still want to at least put some of your money into a portfolio."

For more information on how you can enact a dollar-cost averaging strategy, please give us a call.