Value Averaging

Simply put, this book talks about how to continuously (and systematically) keep investing money to reach your end goal. After reading this book I've become a huge fan of value averaging over DCA, primarily because of the following deficiencies with DCA: * DCA never tells you went to sell (aka: rebalance your portfolio). For that you need to make a market timing decision or pick a random date to do it (suboptimal). If there was a mechanical way of saying, its time to sell, which was optimal, that would be good. * If you invest $100/month in asset A; the $100 you invest in (month 1, year 1) != the $100 you invest in (month 12, year 10), because of inflation and the fact that over the long run the asset A has a non-zero expected return (which is the reason you are investing in it in the first place!) * During severe market corrections. Think 1987 -23% style corrections, DCA will let you buy more shares for the fixed amount but makes no mechanical suggestion to actually buy a lot more shares So essentially, VA is the following: VA is basically a formula based investing strategy like DCA but it tells you when to sell (Think rebalancing). Here you make the value of the fund that you own go up every month and not the actual market price. Lets take a simplistic form of VA: Say you contribute $100 (=contribution amount C) every month to fund X. In month 1 the NAV was $1 and you bought 100 shares. In month 2 you want the value of your fund to go to $200, but it turns out the market price of what you own is now $127, then you contribute only $73 in month 2. In month 3 the fund tanks and value has gone to $150, then you need to put in $150 to keep your value in line to $300. If in month 4 the fund goes crazy and becomes $700 and your target was to get it to $400 you sell $300. No other mechanical strategy tells you when to sell. I strongly recommend fellow DCA-ers to pick up this book!

Simply put, this book talks about how to continuously (and systematically) keep investing money to reach your end goal. After reading this book I've become a huge fan of value averaging over DCA, primarily because of the following deficiencies with DCA: 1) DCA never tells you went to sell (aka: rebalance your portfolio). For that you need to make a market timing decision or pick a random date to do it (suboptimal). If there was a mechanical way of saying, its time to sell, which was optimal, that would be good. 2) If you invest $100/month in asset A; the $100 you invest in (month 1, year 1) != the $100 you invest in (month 12, year 10), because of inflation and the fact that over the long run the asset A has a non-zero expected return (which is the reason you are investing in it in the first place!) 3) During severe market corrections. Think 1987 -23% style corrections, DCA will let you buy more shares for the fixed amount but makes no mechanical suggestion to actually buy a lot more shares So essentially, VA is the following: VA is basically a formula based investing strategy like DCA but it tells you when to sell (Think rebalancing). Here you make the value of the fund that you own go up every month and not the actual market price. Lets take a simplistic form of VA: Say you contribute $100 (=contribution amount C) every month to fund X. In month 1 the NAV was $1 and you bought 100 shares. In month 2 you want the value of your fund to go to $200, but it turns out the market price of what you own is now $127, then you contribute only $73 in month 2. In month 3 the fund tanks and value has gone to $150, then you need to put in $150 to keep your value in line to $300. If in month 4 the fund goes crazy and becomes $700 and your target was to get it to $400 you sell $300. No other mechanical strategy tells you when to sell. I strongly recommend fellow DCA-ers to pick up this book!

I have been utilizing the value averaging approach for about 3 years now, and am impressed with the ideas behind it. Before buying the book, I was very curious about how relevant it would be for a young accumulator like myself. I had the impression that it was a strategy geared towards people that had a lump sum to invest. I also wondered whether it was relevant for those who have already developed a well-diversified portfolio. I found that this book is extremely useful for those that are accumulating as it helps you develop a value path that includes periodic investing. It also makes adjustments for expected growth of contributions (as your wages hopefully increase throughout your career). As far as the second question I had: I initially believed that this value averaging approach needed to be performed on specific funds in isolation. For instance, I thought that I would need to set up separate paths for each of my funds. However, I found that the value averaging approach can be used towards the entire portfolio as a whole. The first step is to develop a portfolio with a suitable asset allocation. Then you feed money into the portfolio according to the value path. This effectively creates two layers of risk-management: - First, you manage your risks by making sure the portfolio itself is well balanced between asset classes. - Second, you manage your risks by adjusting the amount of money you feed into the portfolio based upon its value path. It is important to understand the reasonings behind value averaging. For me, the use of value averaging has two important objectives: - The first objective is a behavioral one. It allows risk averse investors like myself to find a systematic way to put money into the volatile financial markets. Because behavioral issues have a major impact on returns, I believe that this is a very important objective. - The second objective is to dynamically adjust your asset allocation to better reflect an investor's NEED to take risk. The maximum risk you should take should be defined by your risk tolerance, and this is determined by your asset allocation (i.e. when you are feeding money into your portfolio, the money still needs to be going into the right funds to maintain balance in your desired asset allocation). However, when you are exceeding your goals, by going beyond your value path, the value averaging technique actually forces you to put more money into riskless securities (the "side" fund, which is usually a money market fund). This has the effect of temporarily reducing your equity allocation. This coincides with the idea that when you are exceeding your goals, you can afford to take less risk. I find this to be superior to the static asset allocation technique, as I do not believe in taking unnecessary risks if you are on a path to reach your goal. I am very impressed with Edleson's ideas in this book. I think it will be very useful for any investor that has experienced anxiety putting money into the mark

This book should be of intense interest to followers of Robert Lichello's "AIM" (Advanced Investment Management), "Twinvest", and "Synchrovest" dollar-cost averaging methods from 2 generations ago, but Lichello and Prof. Edleson seem to have been unaware of each other's work (understandable given the lack of an internet at the time; their books lived on different sides of the bookstore aisles, "academic" and "popular" works) and no cross-pollinization took place. In any event, Value Averaging is a graduate-level discussion of all the issues about dollar-cost averaging that the AIM students have been struggling toward. Value Averaging can be tough going for anybody without solid undergraduate math skills, but is deliberately constructed to be utilized by anybody trained in algebra, so my suggestion would be to read through the narrations for the concepts and then go back to the chapters covering the methods you think you would like to use to attack the math. I would suggest not bothering to construct the Excel simulator unless you really think you are going to get different results than a Harvard professor and former chief economist at NASDAQ did in hundreds of tries. Several chapters are of universal value to practical students of the stock market: a modern recalculation of performance and volatility for the market for the whole historical period of 1926-2006 is given (each generation needs this exercise to renew the debates about what type of investing produces the best yields), universal volatility ranges for the whole market are derived (a simple single range which can save you countless dollars of subscriptions to simulation softwares), and instructions are given for how to construct simulations in Microsoft Excel (most of the new content in the 2006 paperback edition describes how to translate the original spreadsheeting instructions into excel). This little book is packed with permanent value for students of all stock market systems. Lichello's AIM investors must have this book if they are to take their ideas to the next level, and Prof. Edleson may find himself inheriting the mantle of a movement he may have been wholly unaware of before republishing his method.

I bought a copy of this book from the author about 6 years ago and have found it to be the most useful investment manual I have yet discovered. It played an important role in planning for an early retirement, and I continue to use it in maintaing my retirement portfolio. Two chapters will appeal to an investor at almost any level of sophistication--one dealing with a program of dollar cost averaging adjusted for growth in market values, and one outling a system of "value averaging." The first helps investors to keep their contributions on track to meet their investment goals, and the second provides a rational basis for investors to sell shares, if they are so inclined, when the market departs significantly from a projected "value path." Both programs can be adjusted periodically to reflect changed assumptions about probable market returns. I hardly know how to praise this book highly enough. My own mathematical skills are so poor that I periodically re-read the central chapters to remind myself of the logic I am following. But Edleson helpfully supplies some step-by-step examples of spreadsheet programs that will fully deploy the formulas he explains. This is a first rate book that deserves to be back in print at a reasonable price. But even at [the price], it's worth it.