What are the other names for the cost-average effect?

The main advantage of the cost-average effect is that it can help take advantage of market volatility through favourable purchases made in the interim, thereby ensuring an attractive return over the long term.

When investors have large sums of money available, a lump-sum investment is usually better than paying the amount in over longer periods in installments (for example via a savings plan). This mainly has to do with the so-called opportunity costs that can arise if you don't invest – such as missed return opportunities or making too little use of the compound interest effect.

Nevertheless, an ETF savings plan is a method that can be recommended without reservation for building wealth over the long term – especially for investors without a large amount of starting capital.

In short: both are true. First, on the return aspect: if you fund a savings plan with, for example, volatility-prone equity ETFs, it is quite likely that the CAE will have a positive impact on the return over time. As for the misconception: just because there is no CAE with a lump-sum investment does not make it any worse – often the opposite is even the case.

If investors want to calculate the effect for a savings plan executed monthly, you divide the sum of the savings instalments by the number of units acquired. This gives you an average purchase price. If this is below the purchase price at the start of the savings plan, there is a “positive” CAE (see the table above).

When investors regularly invest the same amount over longer periods in (fluctuating) securities, they can benefit from lower average purchase prices. This approach is particularly attractive for investors who cannot invest larger sums of money at once and yet want to benefit from the advantages of a securities investment over the long term.

Investors can take advantage of the CAE when they invest fixed amounts every month in more volatile securities (usually equity funds and ETFs). More important for investment success, however, are a broadly diversified portfolio, a long investment horizon and the discipline to stick to the investment strategy even in difficult (stock market) times.

The cost-average effect takes effect when a certain amount is regularly invested in a volatile security (e.g. via an ETF savings plan). Investors then buy more shares at lower prices and fewer shares at higher prices. When the average purchase costs are lowered in this way over longer periods, this is referred to as a positive cost-average effect.