3

Value Averaging

This chapter presents a fairly new and simple accumulation strategy, which I call value averaging,1 an alternative approach to investing your money. You may find it useful because it is similar to dollar cost averaging but generally provides a higher rate of return in a long-term investment program.

VALUE AVERAGING: AN INTRODUCTION

Value averaging (VA) is a formula strategy that is more flexible and has a lower average per-share purchase price (and usually a higher rate of return) than dollar cost averaging. Instead of a “fixed dollar” rule as with dollar cost averaging (“buy $100 more stock each month”), the rule under value averaging is to make the value of your stock holdings go up by $100 (or some other amount) each month. This is a very simple version of the strategy, to be enhanced later, but the focus on resulting value instead of on investment cost is the main point. Look at Table 3-1 which shows the same mutual fund prices and investment period that comprised the DCA example in Table 2-1 (page 27).

The example in Table 3-1 shows a value averaging strategy following the rule of making the investment value go up by $100 every month. At the beginning of January 1986, you owned $0 worth of stock, so you had to buy $100 worth of stock (at $4.64) to get 21.55 shares worth $100. Next month, February 1986, the rule says to make the value of your holdings go up by $100 (from $100 to $200), so you must own $200 in stock after your February purchase. Because the ...

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