What is Value Averaging?
Value averaging is a strategy that is designed to allow an investor to incrementally increase the value of the portfolio through the addition of a set amount of assets rather than relying on the existing components of the portfolio to achieve growth. Sometimes referred to as dollar value averaging, this approach follows a specific formula and helps to insulate the investor from the possible decline in the worth of the portfolio due to changes in the market. Unlike the more common practice of dollar cost averaging, value averaging will also include the projected rate of return as part of the formula and projection. Because value averaging is involved with making informed decisions based on specific criteria, this investment strategy is more structured than random investing methods. The concept also can help the investor to be fully aware of the volatility for mutual funds and other securities that are under consideration. From this perspective, the systematic approach that is inherent t
It’s similar to dollar-cost averaging, which I’ve said before I’m a big fan of. But instead of investing a fixed amount at a given time no matter what, value averaging takes the market into account. No, this isn’t “timing the market,” it’s more like “taking into consideration what the market is doing.” Let’s say I want to contribute fully to my Roth IRA, which means I want to invest $5,000 in one year. Instead of breaking it down into five “purchases” of an index fund of $1,000, value averaging works backwards. You want to have $5,000 invested at the end of the year so you invest the first $1,000, then wait until your next buying period. If the market goes up, you invest less. If the market goes down, you invest more. At the end of the year, you’ve invested the same $5,000 but you’ve made small changes as to when you put your money into the market. It’s classic buy low, sell high. When you compare value averaging to dollar-cost averaging, it seems silly not to at least try it and see w
