Strategy
The average-cost effect of investing a fixed amount at regular intervals: a constant contribution automatically buys more units when prices are low and fewer when they are high.
The cost-averaging effect arises when a fixed amount is invested at regular intervals through a savings plan. Because the contribution stays constant while prices fluctuate, it automatically buys more units when prices are low and fewer when they are high.
Over time this produces an average purchase price per unit that smooths out the swings in the market. It carries no reliable return advantage over investing a lump sum; historically, investing the full amount early has in many periods even come out ahead.
The real benefit lies less in returns than in discipline. The savings plan runs automatically and free of emotion, regardless of the current market. This removes the question of the right entry point from the decision and helps investors stay invested through weaker phases.
Related terms
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