What Is Value Averaging?

Value Averaging (VA) is an investment method laid out by Michael Edleson in a 1988 paper and his 1993 book 'Value Averaging.'

The core is to predetermine not the 'amount you add' but the 'target value of the account.' For example, you set a target path that 'my investment account balance should grow by about $370 each month.' Then, each month, you invest only as much as needed to hit that target exactly.

Recurring investing fixes the 'amount you add.' You put in about $370 each month, the same whether prices rise or fall.

Value averaging raises the 'account value' along a fixed path. So the amount you add differs each month.

For example, if the target is 'a balance of about $740 this month' but the market falls and the balance is about $590, you add about $150 more to reach $740. Conversely, if the market rises and the balance is about $890, then this month you add nothing at all, or you even sell about $150 worth to bring it back to $740. In other words, buying more when it is cheap and buying less or selling when it is expensive is enforced as a rule.

Strength: it automatically executes 'buy low, sell high' by rule rather than emotion. In a downturn you end up buying even more, so over the same period your average purchase price can come out lower than with recurring investing.

The limitations are clear.

① It requires a lot of cash on hand. After a big crash, to hit the target you may suddenly have to put in a large sum, which can exceed your budget.

② The calculation is complex. Each month you must recalculate the target path and the required investment amount.

③ In a strong bull market, the 'buy less' feature may actually cause it to lag, and taxes and fees can arise in the process of selling.