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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
www.tandfonline.com [PDF]
… Applied Economics … As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which means that economic losses will be sustained using either of the strategies in … Combining value averaging and Bollinger Band for an ETF trading strategy …

Credit spreads as predictors of real-time economic activity: a Bayesian model-averaging approachCredit spreads as predictors of real-time economic activity: a Bayesian model-averaging approach
www.mitpressjournals.org [PDF]
… Applied Economics … As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which means that economic losses will be sustained using either of the strategies in … Combining value averaging and Bollinger Band for an ETF trading strategy …

An empirical examination of the effectiveness of dollar-cost averaging using downside risk performance measuresAn empirical examination of the effectiveness of dollar-cost averaging using downside risk performance measures
link.springer.com [PDF]
… Applied Economics … As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which means that economic losses will be sustained using either of the strategies in … Combining value averaging and Bollinger Band for an ETF trading strategy …

Bank competition and financial stabilityBank competition and financial stability
www.elgaronline.com [PDF]
… Applied Economics … As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which means that economic losses will be sustained using either of the strategies in … Combining value averaging and Bollinger Band for an ETF trading strategy …

Forecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertaintyForecasting China's foreign exchange reserves using dynamic model averaging: The roles of macroeconomic fundamentals, financial stress and economic uncertainty
www.sciencedirect.com [PDF]
… Applied Economics … As shown in Table 7, using only VA or DCA achieves negative value of return in bear market, which means that economic losses will be sustained using either of the strategies in … Combining value averaging and Bollinger Band for an ETF trading strategy …



Q&A About Value Averaging


What are some advantages and disadvantages of using value-averaging strategies?

Advantages include greater flexibility for investors who want to set aside money regularly for investing without having to worry about market volatility. On the other hand, there are also disadvantages such as increased transaction costs because more trades will be required than with DCA strategies.

Who developed value averaging?

Michael E. Edleson developed the method while at Harvard University.

What is value averaging?

Value averaging is a 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.

How does value averaging differ from dollar cost averaging?

Dollar cost averaging requires an investor to contribute a fixed amount at regular intervals regardless of price fluctuations. In contrast, value averaging allows investors to adjust their contributions based on market conditions so that they can achieve their investment goals.

What does value averaging do?

Value averaging is a technique for adding to an investment portfolio.