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Definition of '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.
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Investopedia explains '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.
The main goal of value averaging is to acquire more shares when prices are falling and fewer shares when prices are rising. This happens in dollar cost averaging as well, but the effect is less pronounced. Several independent studies have shown that over multiyear periods, value averaging can produce slightly superior returns to dollar-cost averaging, although both will closely resemble market returns over the same period.
The biggest potential pitfall with value averaging is that as an investor's asset base grows, the ability to fund shortfalls can become too large to keep up with. This is especially noteworthy in retirement plans, where an investor might not even have the potential to fund a shortfall given limits on annual contributions. One way around this problem is to allocate a portion of assets to a fixed-income fund or funds, then rotate money in and out of equity holdings as dictated by the monthly targeted return. This way, instead of allocating cash in the form of new funding, cash can be raised in the fixed income portion and allocated in higher amounts to equity holdings as needed.
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Search results for 'Value Averaging'
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http://www.investopedia.com/articles/stocks/07/DCAvsVA.asp
Choosing Between Dollar-Cost And Value Averaging. ... Value averaging is a simple,
mechanical type of market timing that helps to minimize timing risk. DCA vs. ...
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http://www.investopedia.com/articles/basics/10/how-to-avoid-emotional-investing.asp
... Find out more in Choosing Between Dollar-Cost And Value Averaging.) Another technique
to diminish the emotional response to market investing is to diversify a ...
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http://www.investopedia.com/articles/01/090501.asp
... I don't see why this time will be any different." (Find out if DCA is right for
you, in Choosing Between Dollar-Cost And Value Averaging.). ...
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http://www.investopedia.com/exam-guide/series-7/packaged-securities/dollar-cost-averaging.asp
... 6.5 Compliance; 6.6 Net Asset Value (NAV); 6.7 Dollar Cost Averaging; 6.8 Mutual
Fund Management; 6.9 Types of Mutual Funds; 6.10 Mutual ...
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http://financialedge.investopedia.com/financial-edge/0910/Easy-Ways-To-Diversify-Your-Portfolio.aspx
... fewer when the markets are high. (For more, see Chosing Between Dollar-Cost
And Value Averaging.). The Bottom Line Ultimately, the ...
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http://www.investopedia.com/articles/retirement/08/annuity-mutualfund.asp
... features, such as dollar-cost averaging, value averaging, periodic portfolio
rebalancing and a wide selection of funds and fund families to choose from. ...
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http://www.investopedia.com/exam-guide/series-7/packaged-securities/net-asset-value-per-share.asp
... 6.5 Compliance; 6.6 Net Asset Value (NAV); 6.7 Dollar Cost Averaging; 6.8 Mutual
Fund Management; 6.9 Types of Mutual Funds; 6.10 Mutual ...
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http://www.investopedia.com/articles/stocks/08/average-down-dollar-cost-average.asp
... (To learn about the downside to this strategy, read Value Traps: Bargain ... Short-term
traders generally do not believe in averaging their positions down, as they ...
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http://www.investopedia.com/articles/pf/11/financial-mistakes-we-make.asp
... dig into the financials and the stock's story to make sure it is worth the
long-term vote of confidence you'll be giving it through DCA or value averaging ( ...
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http://www.investopedia.com/articles/mutualfund/05/071305.asp
... Review of Dollar-Cost Averaging Dollar-cost averaging is carried out simply by
investing ... the number of shares purchased varies based on the market value of the ...
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