Value Averaging


Value Averaging
An investing strategy that works like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base.

For example, suppose that an account has a value of $2,000 and the goal is for the portfolio to increase by $200 every month. If, in a month's time, the assets have grown to $2,024, the investor will fund the account with $176 ($200 - $24) worth of assets. In the following month, the goal would be to have account holdings of $2,400. This pattern continues to be repeated in the following month.

The main goal of value averaging is to acquire more shares when prices are falling and fewer shares when prices are rising. This happens in dollar cost averaging as well, but the effect is less pronounced. Several independent studies have shown that over multiyear periods, value averaging can produce slightly superior returns to dollar-cost averaging, although both will closely resemble market returns over the same period.

The biggest potential pitfall with value averaging is that as an investor's asset base grows, the ability to fund shortfalls can become too large to keep up with. This is especially noteworthy in retirement plans, where an investor might not even have the potential to fund a shortfall given limits on annual contributions. One way around this problem is to allocate a portion of assets to a fixed-income fund or funds, then rotate money in and out of equity holdings as dictated by the monthly targeted return. This way, instead of allocating cash in the form of new funding, cash can be raised in the fixed income portion and allocated in higher amounts to equity holdings as needed.


Investment dictionary. . 2012.

Look at other dictionaries:

  • Value averaging — Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. It was developed by former… …   Wikipedia

  • Value averaging investing — инвестиционная стратегия, направленная на постоянное увеличение стоимости фонда на определенную сумму за определенный период времени. См. также: Портфельные стратегии Финансовый словарь Финам …   Финансовый словарь

  • VALUE AVERAGING INVESTING — инвестиционная стратегия, направленная на постоянное увеличение стоимости фонда на определенную сумму за определенный период времени …   Глоссарий финансовых и биржевых терминов

  • Value investing — is an investment paradigm that derives from the ideas on investment and speculation that Ben Graham David Dodd began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis . Although value… …   Wikipedia

  • averaging — av·er·ag·ing (avґər əj ing) 1. the finding of a mean value in a population. 2. reducing to or taking a typical example of the group under consideration …   Medical dictionary

  • Dollar cost averaging — (DCA) is an investment strategy that may be used with any currency. It takes the form of investing equal monetary amounts regularly and periodically over specific time periods (such as $100 monthly) in a particular investment or portfolio. By… …   Wikipedia

  • Stream thrust averaging — is a process used to convert 3 dimensional flow through a duct into 1 dimensional uniform flow. It makes the assumptions that the flow is mixed adiabatically and without friction. However, due to the mixing process, there is a net increase in the …   Wikipedia

  • Expected value — This article is about the term used in probability theory and statistics. For other uses, see Expected value (disambiguation). In probability theory, the expected value (or expectation, or mathematical expectation, or mean, or the first moment)… …   Wikipedia

  • dollarcost averaging — dollar cost averaging n. Periodic investment of a fixed dollar amount, as in a particular stock or fund or in the market as a whole, on the belief that the average value of the investment will rise over time and that it is not possible to foresee …   Universalium

  • DVA — may refer to: Defence Vetting Agency Department of Veterans Affairs (Australia) United States Department of Veterans Affairs Dollar Value Averaging The Driver Vehicle Agency of Northern Ireland Direct Voltage Adapter Developmental Venous Anomaly… …   Wikipedia