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The Cost-Average-Effect
Monthly Stock Investing – The Best Way to Build Wealth!
The cost-averaging effect describes the impact of an investment made regularly over a longer period of time. The most well-known example of the cost-averaging effect arises from regular investment contributions in stocks ETFs. With a constant monthly investment amount, more shares are purchased when prices are falling and fewer shares when prices are rising.
The major benefits:
To experience the benefits of the cost-averaging effect, the timing of the investments must always be the same. It doesn’t matter whether it’s a weekly, monthly, or quarterly interval. Important: The same amount is always invested at a constant interval.
The positive effects:
In falling markets, more shares are inevitably bought, and in rising markets, fewer shares are bought. Waiting for the right timing to enter, or timing the market, is eliminated. The investment is purchased at an average price.
The psychology of the investor is the enemy:
Take an initial capital of $20,000, a monthly savings rate of $1,000 (growing annually by 5 percent), and a return of 8%. After 20 years, you are a millionaire. If it’s that easy, why do so few people achieve it? Because people often get in their own way. The worst mistake: losses are held onto. Instead of selling a stock when it has fallen by, for example, 10%, many small investors simply wait and accept even greater losses, even though other stocks could have had much greater price opportunities in the meantime. Also detrimental to returns: excessively high risks with hyped-up stocks.
Timing – forget about it:
“Nobody has ever been able to predict the market,” explained Peter Lynch, the American stock market guru, once. That is also not necessarily necessary. Those who invested directly in stocks on the day before the 1987 crash were still better off 10 years later than holders of bonds or savings accounts. Our commitment: capital preservation in difficult stock market years, significant wealth accumulation in good times. Ideally, you benefit from the cost-averaging effect of monthly stock investing and further optimize long-term returns through a more active investment style.
The benefits:
- Very low effort
- No psychological barriers
- No discipline required thanks to fixed purchase dates
- Larger quantities are purchased when prices are falling
- Euphoria or fear as determining factors are eliminated
- Applicable to both stocks and ETFs
Our conclusion:
Cost averaging makes sense, particularly considering that most people have a steady income allowing them to invest month after month. This method aligns with the approach we adopt in our investing service, VF-Invest. We regularly invest in our long-term portfolio, organized as a stock savings plan, capitalizing on the advantages mentioned above through monthly purchases.
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