Value averaging is a strategy that is designed to allow an investor to incrementally increase the value of the portfolio through the addition of a set amount of assets rather than relying on the existing components of the portfolio to achieve growth. Sometimes referred to as dollar value averaging, this approach follows a specific formula and helps to insulate the investor from the possible decline in the worth of the portfolio due to changes in the market. Unlike the more common practice of dollar cost averaging, value averaging will also include the projected rate of return as part of the formula and projection.
Because value averaging is involved with making informed decisions based on specific criteria, this investment strategy is more structured than random investing methods. The concept also can help the investor to be fully aware of the volatility for mutual funds and other securities that are under consideration. From this perspective, the systematic approach that is inherent to value averaging can help to limit the amount of risk that the investor may incur as a result of the transaction.
Since value averaging includes projecting the anticipated rate of return on a given investment, it also will of necessity include an idea of when the investor will choose to sell the security. The investor will want to consider periods when the security will perform above expectations as well as what factors could take place that could cause periods of under performance. During the fluctuation, the investor will adjust buying and selling accordingly, so that the anticipated return can remain more or less constant. This will allow the investor to project when the final average return will be achieved, and thus make it possible to plan when to sell off the security and begin the process with another commodity.
There are a number of investors who routinely use value averaging as a way to build investment portfolios. Because the risk is often minimized and the return is more or less reliable, the process is a great way for investors to methodically increase the value of their investments. A competent broker can recommend investments that tend to work well with this type of investment approach.
