Most investors are familiar with the concept of dollar-cost averaging
(DCA), whereby if you invest fixed dollar amounts periodically, you
purchase more units when the price is low and less units when the price
is high. The effect of this is that you tend to 'average' down the
average unit price of the investment.
Value averaging (VA) is a variation of DCA, whereby you do not
commit fixed dollar amounts regularly; instead you commit more money
when the price is low and less when the price is high. Conceptually, VA
should do a better job than DCA.
VA was first proposed by Michael Edleson and he tested VA using
simulations to compare the returns of investments using VA and DCA. Without considering possible
differences in risk, this is what he concluded:
(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.
Here is one article related to VA - A Statistical Comparison of VA vs. DCA and Random Investment Techniques.
Many investors disagree to a certain extend with the rigid DCA methodology, which
some termed as 'blind DCA'. Instead, they choose to buy more when they
perceive that the price is low and less when the price is high. This is quite similar to VA and investors could actually end up with a better strategy than DCA
provided they can control properly the 'greed and fear' part of
investing.
It is interesting to note from the paper (Table 4) that VA performs
best 79% of the time, DCA only 3.9% of the time and random investing
17.1% of the time. |
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