5

Establishing the Value Path

Chapter 4 covered plans and techniques for achieving your investment value goal with dollar cost averaging. Occasional readjustments to the plan were needed to eventually target in on the final investment goal. With value averaging, the situation is easier. By its very nature, the value averaging strategy involves a portfolio “readjustment” at every investment period, as you buy or sell shares to make your value equal the target value path.1

VALUE AVERAGING VALUE PATHS

There are a lot of ways to set up the value path for value averaging—that is, the schedule of what you want the value of your holdings to be at every point in time. Not all value paths make sense, though. Suppose you wanted to build up value monthly, resulting in $100,000 after 20 years. As presented in the “pure” linear form of value averaging, you could establish a linear value path that goes up by the same amount (1/240 of $100,000) each month. That would be an increase of $416.67 in value every month, and would require a $416.67 initial investment for the first month. As we discussed in Chapter 3, that would be an ineffective and unnatural approach that excessively front-loads the investment, while requiring no investment, or even disinvestment—later in the plan. After 19 years, the value would be $95,000. The expected monthly return on that amount (1.0%), is +$950, more than double the planned, or “allowable,” increase calculated above. You would actually be expected to be a net ...

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