>Value Averaging? Not again!
We consider (again!) investing a fixed dollar amount each month (increasing with inflation) ...
>That's Dollar Cost Averaging, eh?
We also consider Edleson's
Value Averaging ...
Yes, VA, where we insist that our portfolio increase monthly by a fixed dollar amount
(increasing with inflation).
With VA we (usually) have to start with a Money Market fund to provide the dollars necessary to achieve the
prescribed portfolio increase. For example, if we insist that our portfolio increase by $1K each month and the market tanks
and our portfolio just lost $10K this month we'd have to come up with a $11K investment, right?
To be fair in our assessment of VA vs DCA, we should ...
>Why are you doing this AGAIN!?
I'm not sure I was fair ... last time. I don't think I considered the Money Market fund properly.
To be fair in our assessment of VA vs DCA, we should do the following:
- We look at two investors: a DCA investor and a VA investor.
- They each have $A to invest each month (increasing with inflation). That's our DCA investment.
- We do this DCA investing for umpteen years and see what's the final value of our DCA portfolio
(assuming some random sequence of portfolio returns).
- With the same sequence of returns, we insist that our VA investments (increasing with inflation) are such
that we end up with the same portfolio as the DCA investor.
- We also calculate how much Initial Money Market the VA investor needs to accommodate the monthly portofolio increase. (Let's say it's $M.)
- We then assume that both investors (that's DCA and VA) have this $M when they start their investing.
- The DCA investor just leaves the $M in his stock portfolio (subject to those random returns).
- The VA investor has that monthly $A available (as does the DCA investor) and, if she needs
more than that (to achieve that fixed portfolio increase) she takes it from her Money Market fund.
- If the VA investor doesn't need the $A (for example, when she sells shares), then the "extra" monthly
dollars go into her Money Market fund.
- In effect then, we calculate (each month): $X = (DCA Investment) - (VA Investment) = $DCA - $VA
and add that to the Money Market fund for the VA investor. That's sometimes positive (if the required
$VA is small or negative) and sometimes negative (if the required $VA is large.)
- We keep track of the TOTAL number of dollars for each investor (including their Money Market fund) and see
who comes out ahead, after umpteen years.
Wait! Here's a picture of a spreadsheet which does all this:
Just RIGHT-click on the picture and Save target to download the .ZIPd spreadsheet.
Notice, however, that the Money Market fund (for the VA investor) in the lower right corner goes to zero
at one point. That defines the required Initial Money Market. (That's $19,871 in the above example.)
For the DCA investor, that $19,871 just sits in his stock portfolio. You'll also notice that there are TWO annualized returns:
One just considers the stock portfolio, ignoring the Money Market monies. The other considers the total monies for each
investor; stock PLUS money market. You'll also note that the cost per unit is (usually) smaller for the VA investor
Okay. Just download and play ...