Indeed, had we invested enough money at the beginning, and contributed nothing more, eventually our portfolio would have doubled. We could then withdraw that original amount and wind up, after umpteen years, with a portfolio that has cost us nothing. The average price we've paid for our stock is then ... $zero. >So VALUE is better? Does a Value investor always invest more, at the beginning? Is ...? It depends upon the market.
Let's suppose that the stock (mutual fund?) prices are P_{1}, P_{2}, etc.
and we're buying units each month: U_{1}, U_{1}, etc.
so, since the VALUE investor invests $B at the beginning of the N month period, we'd expect that she invests MORE, at the beginning. If the market goes UP, and you have the money, maybe that's good, eh? However, be prepared for pretty violent swings in your monthly investment ... with a VALUE philosophy: If you want your portfolio to increase by $200 per month and it drops by $1000, you've gotta
invest $1200 that month. >You're kidding, right? I mean ... what's the chance of that happening? For our DOW/100 investments, for the 1980s (as shown above), our VALUE portfolio would be
around $18K to $20K in 1987
withdrawing $2232 ... in Jan/87 when the DOW increased almost 14%, to
You must pray that, when you have to come up with $thousands, you have enough in the auxiliary pot where you're storing the withdrawals. Money Market, for example. >Wow! What if I don't have the money?
You can borrow this. If we generate random returns (Normally distributed with Mean = 10% and Standard Deviation = 30%) and assume we invest each year and want a $5000 per year portfolio increase, then we can produce some "typical" results, like so ... where, for Value Averaging (if you have the money and stomach for the wild swings in VA purchases - which are often quite negative), it's possible to achieve a negative cost per unit:
See also DCA versus VA: Average Price See also the Dark Side of DCA. And there's a .ZIPd spreadsheet to generate pretty pictures (like those above).
(The spreadsheet looks like this and there's more info about the spreadsheet Here) |