From Dr. Gerd Kommer
This post was updated in June 2025.
Whenever the media or marketing material from financial service providers talk about fund savings plans and long-term wealth creation with investment funds, the so-called “Cost Averaging Effect” (CAE) inevitably comes up. For decades, financial industry representatives, business journalists and finfluencers have postulated that the CAE has a beneficial effect on returns and risk when saving in funds. Two examples of this are the following typical CAE descriptions from the financial industry and the financial media:
“In most cases, the cost averaging effect ensures a more positive return and a more attractive profit.” – Commerzbank website, accessed on June 12, 2025
"In this respect, the search for the optimal entry point does not play a major role. Rather, the saver benefits from the so-called cost-average effect: If the prices are low, a relatively large number of new fund shares are added. On the other hand, in phases of high prices, comparatively few shares can be bought for the same amount. The investor therefore behaves anti-cyclically and pays an average price for his holdings. Studies show [1], “In the long term, this approach can have significant advantages over a one-off investment.” – the investment magazine Börse Online, issue 37/2016 in a multi-page article on fund savings plans
Most descriptions of CAE from banks, journalists and finfluencers are something like the second of the two examples listed above. It is vague about “buy more shares when prices have fallen and are therefore cheap and buy fewer shares when they have risen and are expensive”. This reduces the average share purchase price compared to a one-time investment.
Private investors are very likely to interpret such statements to mean that the CAE tends to have a favorable effect on their stock returns relative to an initial one-off investment. This reading is actually obvious, since these representations talk about a “favorable” average cost price, about “profiting” and about “advantages compared to a one-off investment”.
Why the usual CAE representations are not correct
It's just unfortunate that this actually intended interpretation is wrong. The CAE does not have a systematic return-enhancing effect and does not ensure a better return “in most cases”. The core element of the CAE – the reduction in the average purchase price per fund share – does exist, but the reduction has no significance for the investor return and, above all, for the final assets achieved; it is merely a banal arithmetic side effect of the underlying economic substance, and this economic substance lacks a systematic positive return effect. Scientists already demonstrated at the end of the 1970s that the CAE is a mirage – at least if one understands it as a structural investor advantage. [2]
Here are the key arguments from the numerous scientific studies that have demonstrated the irrelevance of CAE over the past four decades:
(a) The CAE calculation examples typical in media articles are regularly conceptually incorrect. In these examples, a fund savings plan is used, in which e.g. For example, 100 euros flow into an equity fund every month over 24 months, compared to an initial one-off investment (“AEI”) of 2,400 euros. Why wrong? In the two constellations, the investment amount differs drastically in terms of the time-weighted average. In the first case (fund savings plan) it is 1,200 euros, in the second case (one-off investment) it is 2,400 euros. However, with the fund savings plan (CAE investing), it would be correct to assume that the 2,400 euros are initially already contained in the investor's portfolio (e.g. in a daily money account) and are gradually reallocated into stocks every month. In both cases, an average of 2,400 euros would be invested over time. Where this basic condition is not met, the result of the apples-to-oranges comparison can and should be ignored from the outset.
(b) A surprising number of CAE calculation examples in the financial media are - unfortunately, an unpleasant word cannot be avoided here - faked: The return data on which the calculations are based were specifically selected so that they produce a result that is favorable to CAE. If you take it on the other hand all typical return data constellations or a representative number of empirical-historical data series, the superiority of AEI investing would be obvious in most data constellations. Another trick that the “CAE photo shoppers” like to use is to rely solely on the return metrics when calculating returns internal rate of return (a percentage investor return). However, unless it is ensured, for example, that the invested cash flows (saving rates) are identical overall (see letter [a] above), the internal rate of return can lead to misleading results. In fact, in order to get reliable, really correct results, you have to work on the basis of the final asset value compare. It can e.g. For example, it is easy to see that CAE investing generates a higher internal rate of return, but still leads to a lower final asset value. However, it is the final asset value that is important, not the internal rate of return. There are relatively simple financial mathematical reasons behind this that someone from the financial industry, a financial journalist or finfluencer should actually know.
(c) The lower average price per fund share in the fund savings plan compared to AEI investing has no decisive influence on the relative returns of the two alternatives and in particular on which one achieves the higher final asset value. Low average cost per share is neither a return nor a risk metric. For the final asset value, it depends on how much money is made on each individual day or month with its specific daily or monthly return within the overall period of e.g. B. was invested for three years. Thinking in terms of “costs per fund share” is conceptually completely wrong. One scientist called it a “mathematical illusion” (Greenhut 2006).
(d) When it comes to the volatility (standard deviation) of portfolio returns, CAE investing practically always performs better than AEI investing under realistic conditions - simply because CAE investing has, on average over time, less money invested in the risky asset class of stocks. That's why CAE investing is one basically However, it cannot be deduced from this that it has a risk-reducing effect. For example, if you use the risk ratio Shortfall risk, [3] CAE investing is overwhelmingly inferior to its alternative AEI. By the way: If you just want to minimize volatility, your best bet is not to invest in stocks at all.
The main finding from the research
Examining historical returns of AEI and CAE investments in many different time frames, e.g. For example, over the past 50 years, in the clear majority of time frames - whether twelve months or five years - AEI investing has been more profitable. And the longer the observation period, the greater the final asset value advantage of AEI or the final asset value disadvantage of CAE tends to be. The banal reason for this: stock markets have positive returns in the long term. In a period of time with an overall positive return, early investing (AEI investing) is almost always more profitable than delayed (slower or later) investing, and that is exactly what CAE investing is. This statement does not even take into account the higher transaction costs of a fund savings plan and its poorer tax present value effect (see our blog post here).
The only scenario in which CAE investing always beats an AEI alternative in terms of returns is during stock market phases in which the markets are significantly lower at the end than at the beginning, i.e. h. Stock market downturns or stock market crashes. Naturally, these will tend to be short phases. Anyone who believes they can reliably predict these bad phases will still avoid CAE investing because a complete exit from the stock market would then be the preferred strategy. On the other hand, if you don't consider yourself a clairvoyant, like myself, you at least know that in the long-term future AEI investing will on average be more profitable - in financial jargon, that it has a higher expected return than CAE investing.
Of course, permanent savings in funds, especially with low-cost ETFs, has many advantages and I recommend it without any ifs or buts. These advantages include convenience and a healthy disciplinary effect (not having to think about it every month: “Should I waste this 200 euros now or should I save it for old age?”). The third advantage of gradual or slower market entry - which is what CAE investing is all about - is also purely psychological in nature: If you are unlucky enough to enter the stock market right before the start of a significant downturn with AEI investing, gradual investing would reduce the loss. From a psychological point of view, this prospect is an important consolation for most investors, without which they might not dare to invest a large amount in the stock market. We have published our own blog post on this investment aspect (Link here). In general, this different analysis also shows that a slow, gradual entry into the stock market in small amounts is statistically less profitable than an immediate entry with the entire amount.
The emotional perception advantage of CAE investing does not change the fact that, in the vast majority of cases, AEI investing leads to a higher final asset value than CAE investing. Of course, the AEI winning cases cannot be reliably predicted in advance, but it is guaranteed that they will be more numerous.
However, in practice, the choice between AEI and CAE investing rarely arises for most normal private investors because the majority of us do not often inherit large amounts of money, win the lottery or receive an annual bonus of 100,000 euros. Normal private investors use a fund savings plan not because CAE investing is so terribly clever, but because they have no alternative to it.
Conclusion
The undisputed benefit of long-term fund savings has nothing to do with a cost averaging effect that systematically increases returns. It doesn't exist. Anyone who can should save with funds, but not on the basis of an illusion or lie. The fact that a large part of the financial industry and many financial journalists continue to fool private investors with arithmetic number games decades after the scientific burial of the CAE should give us pause.
literature
Constantinides, George (1979): “A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy”; In: Journal of Financial and Quantitative Analysis; 14; June 1979; pp. 443–50.
Greenhut, John (2006): “Mathematical Illusion: Why Dollar-Cost Averaging Does Not Work”; In: The Journal of Financial Planning; 19; No. 10; pp. 76–83.
Hadad, Elroi/Evangelos Vasileiou (2023): "Benefits and Drawbacks of the Cost Average Plan as an Alternative Investment Strategy; June 5, 2023; Social Sciences Research Network, Internet reference here
Langer, Thomas/Nauhauser, Niels (2002): “On the importance of cost averaging effects in deposit plans and portfolio reallocations”; Internet reference here
Statman, Meir (1995): “A Behavioral Framework For Dollar-Cost Averaging”; In: Journal of Portfolio Management; 22; No. 1; case 1995; pp. 70-78.
Endnotes
[1] The article does not specify which “investigations” these are supposed to be – probably because such studies do not exist, at least by scientists.
[2] If you would like to understand the comprehensive, long-finished scientific discussion about the lack of advantages of CAE compared to initial one-off investments, see the articles listed in the literature list.
[3] Shortfall Risk: The risk of achieving a specific minimum return over a defined period of time, e.g. B. three or fifteen years.