Average cost effect

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The average cost effect ( English cost average effect or dollar cost averaging ) is an effect that should arise from the regular investment of constant amounts in securities (usually in the form of savings plans).

The fluctuations in the value of the securities mean that, ideally, the investor receives his shares at constant rates at a lower price than if he regularly buys a constant number of shares at different prices. Because when unit prices are high, fewer units are automatically purchased, and correspondingly more when unit prices are low. This means that the harmonic mean of the prices is paid per share / share . This may be a little below the arithmetic mean that would be paid if the same number of items were regularly purchased.

This effect is often cited in the advertising of fund savings plans , but it only brings higher profits than the one-off investment with a negative average return. If the average return on the investment is positive, the one-off investment is fundamentally superior.

Effect on the investor

The advantages of using the average cost effect are, besides switching off market timing , financial discipline and the effect that losses look less bad at the beginning. However, the average cost effect initially reduces the fluctuations in value (the volatility ) of the portfolio, which the investor pays for himself by foregoing income. The average cost effect, for example, has a psychological effect, since the entry price rises and falls with the market and the first stock market crash does not lead to excessive losses in the portfolio. Losses and gains are steadily diluted.

However, the average cost effect decreases with the duration of the savings plan, since more and more capital accumulates in the course of the savings and the individual installment makes up an ever smaller fraction of this capital. That means, the saved assets behave more and more as if you had invested the total amount once.

criticism

Some critics of the average cost effect argue that it is just a selling point. It should lower the inhibition threshold among savers and induce them to gradually invest larger amounts than they would otherwise have done with a one-off investment.

The American financial book author Larry Swedroe points out that the academic literature has presented the average cost effect as an inferior strategy compared to an immediate full investment since 1979. Swedroe also points out that the average cost effect is, from a purely logical point of view, contradicting itself: If the gradual investment made sense, then one would have to sell all shares at all times and then buy them back gradually. But then the strategy would recommend selling and buying at the same time, which is logically contradicting each other. Swedroe sees a psychological benefit in the reassurance of a fearful investor who has problems investing everything at once after a crash: If the market rises, he has the advantage that the investment he has already made has increased in value. If the market falls, it is less disadvantaged because it has not lost as much.

Negative average cost effect

Investment advice and the term is negative dollar cost averaging is used ( English negative cost average effect ). What is meant here is that a withdrawal plan from an existing deposit with constant payments results in methodological disadvantages compared to selling a constant number of shares.

The negative average cost effect is also based on the difference between the arithmetic and geometric mean. In practice, a comparison is not possible, because with a withdrawal plan with constant payout it cannot be predicted how long it will take for the deposit to be used up. The calculation is only possible for the past and therefore does not provide any information about future returns.

literature

Web links

Individual evidence

  1. ↑ Comparison: savings plan vs. Single investment - which is better? In: cost average effect . 2018 ( cost-average-effekt.de [accessed on February 5, 2018]).
  2. ↑ marketwatch.com
  3. ^ The costly myth of dollar-cost averaging ( Memento from September 10, 2005 in the Internet Archive )
  4. ↑ Larry Swedroe: averaging Dollar cost. The only guide your'll ever need for the right financial plan (2010), Appendix B.