Value Averaging: The Safe and Easy Strategy for Higher Investment Returns (Wiley Investment Classics Book 35)

by Michael E. Edleson

VA outperforms DCA by more than was previously shown.

it looks as though quarterly is still a good frequency over which to employ value averaging in your investing.

Value averaging, especially over periods of roughly quarterly duration, still appears to work well in concert with modern market dynamics, to the investor’s advantage.

There are two main reasons why you should use the indirect approach in implementing your formula plan: to minimize transaction costs (return enhancement) and to facilitate diversification (risk reduction).

Small share purchases through a broker literally cost a fortune in terms of percentage of the amount invested.

No-load mutual funds that have low numbers for turnover, management fees, and other expenses will do a much better job of keeping your investment expenses down to a reasonable minimum.

It is critical that an investor using any variation of value averaging select an investment vehicle2 that will not trend downward over extended time periods, such as a very diversified no-load mutual fund.

No matter what fund you choose, most likely you will desire it to be “linked” with a money market mutual fund for simplified transfer of funds (telephone switching) into and out of your investment plan.

the vast majority of actively managed funds actually underperform the market.

keep expenses as low as possible.

Stock index funds generally fit this bill, as they strive merely to match some market index—not a bad goal in that doing so would put them well into the upper half (of long-run returns) of all mutual funds’ performance.

provide diversified investment services with very low management fee...

a few index funds and other mutual funds with very low expense ratios are provided in Table 10-1.

past performance is no real indicator of future success.

For investors who hold other assets besides just the one mutual fund, another relevant measure of risk is beta, a number that simply measures the amount of “co-movement” with the market.

high-beta stocks are riskier,

stocks (funds) with a higher beta will achieve a higher investment return, on average

Most of the major sources of mutual fund information available in libraries include an estimate of each fund’s beta.

In choosing a fund, remember that low cost, diversification, reasonable performance, and convenience are all factors that should weigh heavily if you plan on using the fund profitably in a long-term formula investment plan (or even if you’re just going to “buy and hold”).

as long as you remember not to chicken out at market bottoms or get too excited at market peaks.

provide a discipline to guide you through these extremely emotional times in the market,

have a side fund in addition to your main investment fund.

money market fund in the same family of funds as the primary fund

The sometimes radical cash flows resulting from value averaging strategy scare some people at first glance.

Obviously you shouldn’t exceed the investment limits of your IRA, so you would just temporarily fall short of your value goal if the market did that poorly.

First is your final target or goal—$V accumulated in t years.

The other three inputs are $C (your initial investment quantity for the first period);

r, the expected rate of return on you...

g, the amount by which you are willing to increase your periodic invest...

Remember, the process is not exact—you really don’t know what the market will do in the future.

The r growth factor just discussed refers to the expected growth of money you have already invested. The other growth factor, g, refers not to investment results, but to increases in your own contributions to the investment fund.

reasonable value for g is roughly the T-bond11 rate

you must reevaluate it every year or so to see if you are still on track with your ultimate investment goal,

to consider inflation.

Small variances like this will be picked up during the next period.

a quarterly period may be better from a return standpoint,

you can limit the volatility of the cash flow in several ways.

you could limit new contributions only.

One way to think about inflation in the future is that recent inflation rates give a good guide;

IMPLEMENTING VALUE AVERAGING

set up a target value for every point in time between now and your final goal,

Our

investment to 2 × Ct

Both have a natural mathematical tendency to buy more shares when prices are low and to buy fewer (or sell) shares when prices are high.