Most people who have done some reading on investing have heard of the concept of Dollar Cost Averaging (DCA), which involves spending the same amount of money regularly buying their chosen investment, regardless of how the investment fluctuates. For example, I could commit to buying $100 of VFINX every month, no matter what the share price is. If it drops, I buy more shares at the lower price.
Near the end of reading The Intelligent Asset Allocator, I ran across the concept of Value Averaging (VA), which is supposedly gives you a bit better returns than DCA. A simplified version of this method involves trying to increase the total value of your investment by the same amount every month. For instance, instead of my DCA plan above, I could decide to increase my total value of VFINX by $100 each month.
To do this, first, I would buy $100 of VFINX. Then, if after a month my shares of VFINX went up to $110, I would only invest $90 next. If it actually dropped to $95 instead, I would have to pony up $105. This would continue each following month, so that at the end of a year I should have $1,200 of VFINX. This can get tricky though, since some months you may not invest anything at all, and others you make have to scrape up much more than $100 to keep your pace.
But, by doing this, Value Averaging makes you buy even more than DCA would when the fund is dropping and less when it is rising, keeping you from doing what most people actually do – the exact opposite! A more detailed analysis of DCA vs. VA can be found here by a fellow named Gummy.
Personally, although VA is probably better performance-wise than DCA, it removes my favorite thing about DCA – you don’t have to think about it. You can set your brokerage to automatically debit your checking account the $100 every month and buy your mutual funds. No calculators or spreadsheets required. You don’t even have to log into your account! Still, VA is an interesting alternative that I had not read about before.
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I agree, it would probably be better to do VA, but there is too much to worry about each month with that. It is much easier to just setup my investments to be automatic and let it go.
I learned about VA from Bernstein’s books as well. What I’ve started doing isn’t exactly the VA thing, but I think it’s close enough to achieve similar benefit.
Every three months I take what would otherwise be my DCA contribution, but instead of contributing a set amount to each fund I try to do the taxable-account-rebalance-only-with-new-money thing. If TSM didn’t grow as much as Ultra Small, then TSM’s getting whatever additional amount is necessary to balance it out. That way, it’ll take longer before rebalancing-via-taxable-event is needed in the taxable account.
Of course, if one fund ever tanked beyond my contribution amount I wouldn’t be able to rebalance it fully in one purchase. But I figure it’s better than contributing more to a fund that’s already above my allocated percentage.
(Doesn’t apply to my retirement account, which is just getting the DCA from my paycheck, or my Roth which gets a yearly lump sum.)
That sounds like a pretty decent technique. But I think sticking with DCA is easier and less costly since it takes less of your time.
I do the same as Dan. As money comes in I rebalance as I buy on a monthly basis. Of course I don’t buy all 20 assets each month, just a few each month.
Wes