- Value averaging (VA): make your total investments go up by $100 (or some fixed amount) per month (or quarter). Focused on portfolio value instead of cost, and can flexibly sell at overvaluation points. VA results in a lower average per-share price than dollar cost averaging (DCA) over time.
- Formula plans help a) avoid herd mentality and ill-timed shifts; and b) guide in buying low and selling high.
- VA outperforms DCA, which outperforms constant share (CS) strategy. However, VA (and DCA) need to be adjusted upward for market growth or else contributions are worth less and less over time.
- In 5-year historical periods and simulated periods, using growth adjustments, VA outperformed DCA 90-95% of the time, averaging ~1.5% higher annualized returns. Using the no-sell version reduced the outperformance by ~20bps. The outperformance increases (decreases) with higher (lower) market volatility.
- VA is highly flexible. To reduce transaction costs and taxes, limiting cases: no-sell version, limit selling, or time sales to offset tax effects.
- Due to strong evidence of short-term momentum and medium-term mean reversion in returns, the ideal VA frequency is quarterly. Recent 20-year market activity however, has not shown short-term overreaction. Thus, the VA strategy is expected to be a little less compelling.
Finished: Apr-2008