What is the cost average effect?

The cost average effect, also known as the average cost effect or cost averaging, allows investors to structure their regular contributions to a savings plan in such a way that they potentially achieve higher returns. With this approach, investors buy a fixed amount of securities at set intervals – for example, monthly – regardless of their current prices.

If prices fluctuate on the stock market, investors receive more shares for their fixed amount when prices are lower. On the other hand, they acquire fewer shares when prices are higher. Over a longer period of time, this means that, on average, investors achieve more favorable prices for the securities than those who buy a fixed number of securities at a single point in time. However, the average cost effect is not guaranteed in every case.

How does the average cost effect come about?

With a savings plan, investors regularly buy securities for a fixed amount. Due to the constant price fluctuations, they receive different amounts of securities for their securities account with each purchase. Over a fixed period of time, investors can calculate the average price they paid for the securities.

This average price is then compared with the price paid by other investors who buy a fixed number of securities at a single point in time. Often the average price is lower than the price paid when buying a fixed number of securities. This can create the average cost effect and thus lead to a higher return. However, the effect is not always beneficial. There are scenarios in which a one-off investment achieves a better return than a savings plan.

Focus on the advantages and disadvantages of the cost average effect

The average cost effect can reduce the average cost of securities over a longer period of time and thus contribute to a more positive return. This effect can be particularly advantageous in volatile markets. Nevertheless, there are risks: If prices fall consistently, the effect can lose its impact and impair returns.

Investors must also bear in mind that fewer units are purchased when prices are high with a fixed savings amount. This can affect the total dividend if a dividend is distributed. Investors with a fixed savings amount and a variable number of units can therefore receive a higher dividend and consequently achieve a higher return.

The cost average effect can prove to be a useful tool for investors to benefit from fluctuating prices in volatile markets. Nevertheless, investors should carefully weigh up both the advantages and disadvantages and carefully incorporate the effect into their investment strategy.

Finally, it should also be considered whether a savings plan is better suited as a custody account solution or in a net insurance wrapper in order to take advantage of any tax benefits. However, this should always be discussed with a competent advisor