The Value Averaging Approach to Portfolio Management

Value averaging or “dollar value averaging” is an investing strategy whose popularity has increased in recent years. Under a value averaging strategy, the investor looks to invest greater amounts when share prices are lower and smaller amounts as share prices rise. The value averaging approach helps minimize the investor’s downside risk by protecting against dramatic declines in portfolio value due to market changes. To implement the value averaging approach, the investor must determine the expected return in order to identify periods of above and below average performance. After an investment has performed above average, the investor will buy less. The investor would buy more after a period of below average performance.

Value Averaging v. Dollar Cost Averaging

Value averaging is similar to the dollar cost averaging (DCA) approach in that they both call for regular monthly contributions from the investor but, unlike value averaging, dollar cost averaging does not make adjustments to the contribution amount based on performance. Instead, a fixed amount is invested at regular time intervals, regardless of the performance or current share price of the investment. With dollar cost averaging, the investor buys more shares at lower prices and fewer shares when the price is relatively high. The goal of the dollar cost averaging approach is to minimize the average share cost over time.

The Main Benefits and Drawbacks of Value Averaging

The primary benefit of the value averaging approach is that it guides the investor through a process of contributing less money when prices are high and more when prices have declined. Given that, it is easy to see how, over time, this approach can have better results than dollar cost averaging. On the downside, value averaging can be more time-consuming that dollar cost averaging, which essentially runs on auto-pilot.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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