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Many investors rely on traditional approaches to build wealth, but there is a strategy that adds a dynamic, disciplined twist. Known as value averaging, this method adjusts contributions based on your portfolio’s performance against a predetermined path, striving for more disciplined and systematic investing.
Before exploring value averaging, it helps to look at its more common cousin, dollar-cost averaging (DCA). In DCA, you invest a fixed amount on a regular schedule, regardless of market conditions. For example, you might put $500 into an index fund every month without ever changing that amount.
This simplicity offers two major benefits. First, it maintains emotional discipline by preventing attempts to time the market. Second, it spreads purchases across ups and downs, reducing the risk of a single bad entry point. However, because cash remains uninvested until each purchase, DCA can reduce long-term returns compared to lump-sum investing, as noted by FINRA and Morgan Stanley research.
Value averaging (VA), sometimes called dollar value averaging (DVA), was developed by economist Michael Edleson in the 1980s. It builds on DCA by setting a target portfolio value path for each period. Instead of investing a fixed sum, contributions vary to keep the portfolio on track.
At its core, VA forces you to buy more when markets fall and buy less—or even sell—when markets rise. This counter-cyclical approach can improve average purchase prices and create a sense of precision and control.
Imagine you aim to grow a portfolio to $3,600 over 36 months. Your target path increases by $100 each month: $100 at month one, $200 at month two, and so on. If in month two your portfolio reaches $205, you withdraw $5 to reset to the $200 target. If it hits only $101, you contribute $99 to reach $200.
This method ensures you maintain a precise trajectory. During market dips, the strategy mandates larger contributions, buying more on dips. When the market surges, you may contribute less or withdraw, essentially selling into strength.
Both strategies aim to reduce timing risk, but they differ in mechanism, complexity, and practical requirements. The table below summarizes key distinctions:
The debate over whether value averaging truly outperforms DCA is ongoing. Wikipedia cites research showing DCA defeats VA about 61% of the time, with an average advantage of 3.2%. FINRA warns that, like DCA, VA can reduce long-term returns by holding cash too long and increasing trading costs.
However, proponents argue that VA’s opportunistic buys and sells can yield a better average cost basis in volatile periods. While lump-sum investing often emerges as statistically superior, VA remains a compelling alternative for disciplined investors seeking a dynamic strategy.
Value averaging is best suited to investors who have:
If you crave a more responsive strategy than fixed contributions, value averaging may offer a smarter, rules-based approach. It forces discipline, leverages market volatility, and provides a clear path toward growth. Yet it demands liquidity, operational effort, and emotional fortitude.
For many investors, the simplicity of dollar-cost averaging remains appealing. But if you can navigate its complexities and maintain the required cash reserves, value averaging can be a powerful tool. As with any strategy, thorough planning, backtesting, and honest self-assessment are essential. With the right mindset, you can transform volatility into opportunity and stay squarely on track toward your financial goals.
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