Value Averaging

What is ‘Value Averaging’

An investing strategy that works like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month’s contribution according to the relative gain or shortfall made on the original asset base.

Explaining ‘Value Averaging’

For example, suppose that an account has a value of $2,000 and the goal is for the portfolio to increase by $200 every month. If, in a month’s time, the assets have grown to $2,024, the investor will fund the account with $176 ($200 – $24) worth of assets. In the following month, the goal would be to have account holdings of $2,400. This pattern continues to be repeated in the following month.

Further Reading

  • Combining value averaging and Bollinger Band for an ETF trading strategy – [PDF]
  • Credit spreads as predictors of real-time economic activity: a Bayesian model-averaging approach – [PDF]
  • An empirical examination of the effectiveness of dollar-cost averaging using downside risk performance measures – [PDF]
  • Bank competition and financial stability – [PDF]
  • Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty – [PDF]