Dollar cost averaging

The average cost effect (English average cost or dollar cost averaging effect ) is an effect of (mostly funds) should arise in the regular system fixed amounts in securities.

The fluctuations in value of the securities mean that the investor receives his shares on average cheaper in equal installments, as if he too different prices buys a consistent amount of shares regularly. Because at high share prices less shall be automatically purchased at low unit prices correspondingly more. Thus, the harmonic mean of the prices paid per unit / share. This is where appropriate, somewhat below the arithmetic mean, which would be paid at regular purchase the same quantities.

This effect is often referred to in the advertising fund savings plans, however, he bestowed no means higher profits. If the average return of the investment is positive, the one-time investment is fundamentally superior. The average cost effect diminishes, however, initially the value fluctuations ( volatility ) of the portfolio, which the investor buys a waiver of income.

However, the average cost effect decreases with increasing duration of the savings plan, as more and more capital is accumulated in the course of Ansparens and the single rate makes up a smaller and smaller fraction of this capital. That is, the accumulated assets behaves more and more as if you once created the total amount.

Also, the used for comparison strategy of buying fixed quantities, can not be implemented in practice, but can be calculated only in retrospect: To create a certain amount in a certain period of time, must be known to calculate the fixed number of price development. If this is known, can also still find any better strategies.

Criticism

Some critics of the average cost effect argue that it is merely handle a selling point. It should lower the threshold for savers and lead them gradually larger sums to invest than they otherwise would have done it at a one-time investment.

The U.S. financial author Larry Swedroe points out that the academic literature hinstellt the average cost effect since 1979 as inferior strategy compared to immediate full investment. Swedroe also refers to the fact that the average cost effect is seen purely logically contradictory: If the progressive system would be useful, then you would have at any time all the shares sell and then buy back gradually. Then the strategy would, however, recommend the sale and purchase of the same, which contradicts logically. Swedroe but provides a psychological benefit in calming a frightened investor who has after a crash problems with it, to invest everything at once: If the market, it has the advantage that its already incurred investment has increased in value. If the market, it is less disadvantaged because he has lost so much.

Negative average cost effect

Add the investment advice and the term negative average cost effect is used (English negative cost average effect). What is meant here that result from a withdrawal plan from an existing depot with constant payouts methodological disadvantages compared to a sale of a constant number of shares.

The negative average cost effect is based on the difference between arithmetic and geometric mean. In practice, a comparison is not possible, because with a withdrawal plan with constant payout can not be predicted how long it takes until the vault is consumed. The calculation is only possible for the past and for the future provides no information about the potential returns.