Value averaging is an investment strategy and this strategy was introduced in the market by Michael Edleson in late 80s. Value averaging is used for investing in a periodic manner. In the value averaging strategy, deciding the target value of a particular holding is the most important factor.
This target is set for a specific period. There are specific formulae of setting the targets. The holding’s target value is also related to the investment objectives of the investors. These objectives play a major role in determining the targets for the holding. Once the target is determined, it becomes easy to maintain the value for that particular period.
For the purpose of meeting the targets, the investors invest small amount of money in the holding in every period. At the same time, there comes certain periods when investors sell a certain part of their holdings so that the target for that period can be achieved.
In this way, the investors are actually compelled by the value averaging strategy to invest in the holding when the market is low and to disinvest when the market is high.
The value averaging is one of the preferred investment strategies followed by the investors. The reason behind this is that the internal rates of return provided by the value averaging strategy are too high. At the same time, it is one of the best investment strategies that are based on the formulae.
Value averaging is often compared with several other formula based strategies. Among these strategies, dollar cost averaging is very popular. Though there are a few similarities among these strategies but the differences are lot more than that. The main difference between value averaging and dollar cost averaging is the amount of investment. In value averaging, there is a target for every period and it changes from time to time, but in dollar cost averaging, the amount of investment is same for every period. At the same time, the value averaging strategy also asks to sell a few shares whenever it is necessary but the dollar price averaging hardly asks the investors to do such things.
Last Updated on : 1st July 2013