What is Value Averaging Strategy?
Value averaging is one another stock or mutual fund trading strategy which can be used to hedge losses due to market falls. The idea behind value averaging strategy is just like Dollar Cost Averaging (DCA) strategy except an added value factor. Here, unlike buying equities for a fixed amount the investor buys equities for fulfill a targeted portfolio value.
For example you start an investing portfolio that you opt to grow $300 a month. You brought the equity for $300 for first month but at the end of first month, due to the growth in equity price, your portfolio value has increased to $350. So for next month, instead of investing $300, you should invest $250 (300 + 300 - 350). At the end of second month, due to market recession, your portfolio worth only $550, instead of $600. So you should invest $350 for achieving your target value. And so on.
Value averaging is a more evolved strategy than DCA. In long-run it offer more profit than DCA. You can add more equities when market falls and fewer when market is on upward movement. The disadvantage is, in higher portfolio values, it becomes difficult to fulfill the monthly cost. Like in above case the portfolio value after 2 years should be $7,200, and a market downfall can change it value to $6,500. So you need $1,000 (reduced 700 + monthly 300) to buy equity.
For example you start an investing portfolio that you opt to grow $300 a month. You brought the equity for $300 for first month but at the end of first month, due to the growth in equity price, your portfolio value has increased to $350. So for next month, instead of investing $300, you should invest $250 (300 + 300 - 350). At the end of second month, due to market recession, your portfolio worth only $550, instead of $600. So you should invest $350 for achieving your target value. And so on.
Value averaging is a more evolved strategy than DCA. In long-run it offer more profit than DCA. You can add more equities when market falls and fewer when market is on upward movement. The disadvantage is, in higher portfolio values, it becomes difficult to fulfill the monthly cost. Like in above case the portfolio value after 2 years should be $7,200, and a market downfall can change it value to $6,500. So you need $1,000 (reduced 700 + monthly 300) to buy equity.
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posted by Daniel Pipitone at
3:22 AM
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