Value Averaging
Value averaging is an investment strategy developed by Michael E. Edleson, former Harvard University professor. Value averaged technique is based on monthly contributions to portfolio which is the same as in Dollar Cost Averaging (DCA) technique, but there is a main difference: when investor sets a target growth rate of the portfolio each month, he adjusts the contribution to the relative gain or shortfall.
Consequently, investor will contribute more to the portfolio when market falls in order to increase the balance to previously set value, or contribute less in periods of market rise.
For example, if investor has a portfolio worth $10.000, and sets the goal for portfolio to increase by $1.000 every month, if the portfolio increases just $500 next month, investor will contribute additional $500. For the next month, goal for portfolio increase will be set at $12.000. The pattern repeats every month. In the case of large market rise, if portfolio growth exceeds its monthly growth rate, investor may be required to withdraw assets from the portfolio.
There are some studies conducted in order to compare Value Average and DCA methods, which have shown superior returns of Value Averaging technique over long-term periods.
Remember that main deference between Value Averaging and Dollar Cost Averaging techniques is in the variable amount of money contributed to the portfolio each month.
| Related Terms: |