WHAT IS VALUE AVERAGING

Value Averaging is a combination of its better-known cousin - "dollar-cost averaging" - and a process known as "portfolio rebalancing." 

The value averaging method, has been shown to produce better results over time than the old "dollar-cost averaging" method. Edeleson has tested VA using simulations to compare VA to DCA and purchases of a constant number of shares in each investment period. Without considering possible differences in risk, Edleson concludes:

• “There is an inherent return advantage of value averaging (over dollar-cost averaging and purchase of a constant number of shares).”
• “It’s about as close to ‘buy low, sell high’ as we’re going to get without a crystal ball.”

Edleson, who was also a managing director at Morgan Stanley (MS), relied on one crucial piece of information that was missing from the "dollar-cost averaging" method to come up with "value averaging." 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.

When a portfolio is underperforming, share prices are likely to be low. And that’s when you’ll be investing more to make up for the underperformance. When the portfolio is outperforming your target rate return, share prices are likely to be high. That means it is not a good time to buy and you could even sell for a profit, provided you maintain your predetermined average growth rate.

Value Averaging is a nice way to ensure you follow one of the most well known investment mandates: Buy low and sell high. The method is particularly valuable during times of high volatility to help ensure investors maintain discipline in their investing. And in these difficult market conditions, it’s certainly worth considering.

“The rule under value averaging is simple: ... make the value not (the market price) of your investment go up by a fixed amount each month.”