VALUE AVERAGING - THE STRATEGY FOR HIGHER
Value averaging is a formula investment
strategy which has be shown to achieve lower average costs
and higher rates of return than alternative strategies.
power of the Value Averaging method derives from its
marriage of two proven but separate techniques:
Cost Averaging and Portfolio Rebalancing.
Value Averaging is not new as it was first researched and
written about in 1988 by then Harvard Professor
Dr. Michael Edleson. By
considering a portfolio’s expected rate of return (something
that the "Dollar-Cost Averaging" method neglects), the
"Value Averaging" method helps to
identify periods of over and underperformance.
In his own words, Edleson defines the value averaging
concept as: "... make the value not the market
price of your stock go up by a fixed amount each
The mathematical imperative of Dollar Cost
Averaging (DCA), the time honored purchase of equal periodic
amounts of stock or mutual funds, forces investors to buy more shares when prices are low than when they
are high, increasing overall returns, on average.
Rebalancing, on the other hand, is most often applied to
mature portfolios and mandates the periodic adjustment of
portfolio allocations back to a set policy, forcing a strong
policy of “buy low / sell high”
discipline into an investors trading decision making.
The genius of VA lies in the combination
of the two techniques, VA and DCA, into the accumulation
phase of a portfolio. Not only are more shares bought when
prices are low and fewer shares when prices are high, as
with DCA, but more money is deployed into stocks when prices
are low and less when prices are high producing yet more
salutary long term results.
VA is particularly
valuable during times of high volatility
shown to produce better results over time than the old
"dollar-cost averaging" method.
Value Averaging is a simple proven investment
method that savvy investors can chose to adopt
as part of a well-rounded financial plan. We believe that
it is a strategy that works
regardless of the economic times and it allows
investors to feel comfort knowing that there is a high
probability that their capital accumulation needs will be
met. While past out-performance is no guarantee of future
out-performance, investors and financial advisors should
consider implementing the Value Averaging strategy since
probability of achieving the target value for a portfolio is
very high and hence ideal for financial / retirement
planning. The financial services industry would also benefit
from this technique enabling them to offer a research based
"sell" as well as their plentiful "buy" signals.
At VA Investment Software, we have
developed a web-based calculation / analysis engine that
allows us to back-test the Value Averaging
strategy, over any time frame, using historical data from any
Stock, ETF or mutual fund.
The Value Averaging Software is
now available for license to
financial services companies such as stock brokerage firms
and mutual fund companies.
Brokerage firms or mutual fund companies are
Bruce Ramsey for a
of this amazing software at 905-901-3063