Value Averaging

Value averaging (also known as dollar value averaging or DVA) is an investment strategy designed to offer greater control and potentially superior returns compared to traditional dollar-cost averaging. Originally developed by former Harvard professor Michael E. Edleson, this approach emphasizes investing with intentionality—adjusting your contribution amount based on performance, rather than investing the same amount at regular intervals.

This guide provides a comprehensive breakdown of how value averaging works, its key benefits, and the considerations investors should make before implementing it.

What Is Value Averaging?

Value averaging is a performance-sensitive investing strategy where the amount of money you invest changes depending on whether your portfolio is above or below a pre-established target value.

In contrast to dollar-cost averaging—where you invest a fixed amount regularly regardless of market performance—value averaging sets a growth path (e.g., $1,000 portfolio growth per month). You contribute more when your investments underperform and less (or even withdraw) when they exceed the target.

How Value Averaging Works

Let’s consider a basic example:

• Target Portfolio Growth:$1,000 per month
• Month 1:You invest $1,000. Portfolio total = $1,000
• Month 2:Portfolio grows to $1,100. To meet your $2,000 target, you invest only $900.
• Month 3:Portfolio falls to $1,800. To stay on track for a $3,000 target, you invest $1,200.
• Month 4:Portfolio rises to $3,100. You invest only $900 to reach a $4,000 total.

This method systematically buys more during dips and less during rallies, supporting a “buy low, sell high” approach without the need to time the market.

Value Averaging vs. Dollar-Cost Averaging

While dollar-cost averaging remains popular due to its simplicity, value averaging provides a more strategic framework for compounding returns, especially in volatile markets.

Benefits of Value Averaging

1. Disciplined investment behavior: Forces you to avoid emotional reactions to market swings.
2. Greater responsiveness to market conditions: Contributes more when it counts most.
3. Potential for improved long-term returns: By emphasizing undervalued entry points.
4. Tailored to investor goals: You define the growth path, aligning contributions to milestones.

Limitations and Considerations

Despite its advantages, value averaging isn’t without caveats:

• Requires active monitoring: Monthly or quarterly recalculations are essential.
• Higher transaction costs: Frequent buying and adjusting could incur brokerage fees.
• Liquidity requirement: May demand more capital when the market dips significantly.
• Tax impact: Selling portions of your investment when outperforming may trigger capital gains taxes.

Investors should factor in these elements and possibly automate the process with spreadsheet tools or investment software.

Practical Application and Tools

To implement value averaging, you’ll need:

• Atarget growth schedule(monthly or quarterly).
• Aspreadsheet or toolto calculate the required contributions.
• Access to a brokerage account with low fees and flexible funding options.

Many investors use platforms like Excel, Google Sheets, or financial planning tools like Personal Capital to model and track contributions.

Note: Michael Edleson's book, Value Averaging: The Safe and Easy Strategy for Higher Investment Returns, remains the definitive guide for those wanting to master this method.

Common Misconceptions

“It’s too complicated.”
While it requires more input than DCA, value averaging can be automated with the right tools, and its learning curve is modest.

“It only works in bear markets.”
Value averaging is designed for all market conditions. Its strength lies in consistently adhering to a target growth path.

“It’s only for advanced investors.”
Beginners can also use this strategy effectively, especially with basic spreadsheet models and clear investing goals.

Who Should Consider Value Averaging?

• Investors withstable incomeand flexibility in monthly contribution sizes.
• Long-term savers aiming formilestone-based portfolio goals(e.g., retirement, college).
• Those comfortable withactive portfolio oversightand decision-making.

Key Takeaways

• Value averaging adjusts contributions based on portfolio performance, not on a fixed schedule.
• It oftenoutperforms dollar-cost averagingby emphasizing contrarian investing behavior.
• Discipline, liquidity, and trackingare key to making the strategy work.
• It’s suitable forlong-term, milestone-oriented investorswho are comfortable managing variability in their monthly investments.
• Although more effort is required, tools and templates make it accessible even for non-experts.