Value Averaging
An investment strategy that adjusts each periodic contribution so a portfolio's total value grows along a predetermined target path, buying more when prices fall and less (or selling) when prices rise.
Value averaging is an investment strategy that sets a predetermined target path for a portfolio's total value over time, then adjusts the size of each periodic contribution to bring the actual portfolio value back in line with that target — contributing more than the baseline amount during periods when the portfolio's value has fallen behind the path, and contributing less (or even selling some holdings) when the portfolio's value has run ahead of it.
This differs from dollar-cost averaging (see Kaavon's "Dollar-Cost Averaging" glossary definition), which contributes the same fixed amount every period regardless of how the portfolio's value has moved — value averaging's variable contribution size is specifically designed to buy proportionally more during price dips and proportionally less during rallies, which backtested historically to sometimes produce a modestly better average purchase price than fixed-amount DCA, at the cost of requiring the investor to track a target path and occasionally contribute a much larger amount, or even sell, depending on recent price movement.
Examples
- A value averaging investor whose portfolio has fallen well behind its target path during a downturn would contribute a larger-than-usual amount that period to catch the portfolio back up.
- Unlike dollar-cost averaging's fixed contribution size, value averaging can require occasionally selling a portion of holdings if the portfolio's value has run ahead of its predetermined target path.