Value Averaging

#1

I have stumbled upon this concept via a link that was posted somewhere in an unrelated thread.

To me this looks like a reasonable idea but I have also seen criticisms of it and am not yet completely sure how to implement it.

Has any of you ever tried or contemplated this method?

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#2

i honestly havn’t looked into these strategies too deeply. i strictly stick to investinvestin each month everything available for investing, regardless of prices etc… this is my way to avoid any kind of “delay the stock purchase one month”- market timing.

#3

From what I understand, using this technique you setup a target growth rate of your portfolio and adjust your contributions accordingly.

But where i am not totally convinced is :

  • How do people set their target growth rate/amount? Do they say, for instance “I want a growth of 10% annually”, regardless of market environment?
  • When you are in a bear market, you may have to make VERY large contributions to cancel your losses and reach your target. In a violent one (let’s say a -50% bear market) you will run out of cash to invest very quickly…
#4

I totally agree with Julianek. You may experience illiquidity during severe bear markets. The DCA is a form of market timing since it is very likely that you invest more during downturns and less when the market performs better. I am not against timing the market to a reasonable extent and in a reasonable way, but if you want to see your asset base grows, you shouldn’t invest less in a recovery phase for example (2009-2014) than during the downturn. When the market crashes you will experience significant losses and you will have to invest large amounts of money. After the crash, you may experience golden years (+10% some years) and you don’t want to miss these one because of DCA.

Note that there are always value in the market, sectorial downturns provide opportunities even in a dynamic bull market (oil, retail, etc…). Therefore, I would recommend you to make monthly fixed contribution instead of DCA and then spot the fair deals.

#5

Well that is where I got stuck.

That is probably way easier anyway.

There is also an implementation with fixed minimum and maximum contributions which may be an interesting alternative but I am still stuck at the target definition anyway.

#6

How do you plan to do the value averaging, could you please check out this thread (Value Averaging) and maybe give some input?

Sorry for the relatively unrelated post

#7

What I was thinking is to say that I want, for example, to have a portofolio comprising 20k CHF of stocks at the end of the year and that I plan to invest every quater starting from 0 CHF.
This means that I want my total stock shares to grow 5000 CHF every quarter. Based on that, if the market price increases between two quarters, I’ll have to buy less shares to match my desired growth and I’ll buy more shares if the market price decreases.

Now, the difference between DCA is that I don’t know how much I’ll end up investing at the end.
If the market price increases too much, I’ll might not invest as much as a wanted and have some left over cash. But that may be a good thing to keep this cash and invest it when (if) the market goes down later.

If the market price decreases too rapidly, I may invest all my cash before the end of the year. But again that may be a good thing…

I was think of using this strategy just for investing the cash I currently have and then switch to the much simpler DCA when I’ll be just investing what I’m saving.

The best would be to run a few simulations to understand the long term effects of VCA vs DCA in this scenario. I might try it if I find the time.

I’m really new to all this, so If you have remarks or if you see a fundamental flaw in my reasoning, please let me know!

Also, if someone has something to say about my previous question about rebalancing when stocks and cash/bonds are not in the same currency, I’m still interested!

Thanks

#8

In general, money brings better returns when invested than when not. That’s why going all in at once is on average better than DCA (paying in monthly installments). If you are already fully invested, and you generate monthly income with your salary, then again it would be advisable to invest all your savings (minus the amount that you intend to keep in cash).

In your VCA strategy I see the following problem: if there is a crash, and your portfolio drops from 50’000 to 30’000, are you going to put 20’000 that month?

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#9

That’s why going all in at once is on average better than DCA (paying in monthly installments)

It may be better in average, but since I’m doing it just once, there won’t be any average if go all in. So DCA or VCA would offer some averaging.

if there is a crash, and your portfolio drops from 50’000 to 30’000, are you going to put 20’000 that month?

Yes… wouldn’t it mean that it is a good time to invest more? Anyway, I would put up to the amount I decided to invest initially. Which would mean that I would go all in at this time, like you suggested before.

Let me know If I’m clear. It’s not entirely clear for me :wink:

#10

I know what you mean. You’re afraid to go all in, even if statistically speaking this would give the highest expected value of results. A potential loss hurts more than equally-sized gain.

I think if your portfolio is already pretty big, like 2 years of saving, and then comes a crash, you will have trouble to keep up with your VCA plan, you will just run out of cash.

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#11

You’re afraid to go all in, even if statistically speaking this would give the highest expected value of results.

Yes exactly. Because If I go all in, statistics does not really matter for me since I’ll do it once.

As I mentioned, my idea is to follow a VCA to invest my cash stash until I run out of cash and then follow with a simple DCA with what I regularly save.

#12

I started that at one point too but I had issues getting data to run it against and did not find a good way to set the goals, in the end I abandoned it. I would still be interested in the results, as I intuitively think it is slightly superior to DCA.

#13

If you have a personal investment plan layed out, and did so with much consideration, then you should really stick to it regardless of some feelings.

now let me point out a nitpick

wrong. your investments are subject to the same statistics as everyone elses.
if it is more important to you to avoid or decrease a potential loss over having the highest expected value in returns, then you may very well split up your investments.

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#14

I’m not saying that my investments are not subject to the same statistics than everybody else.

Maybe I’m not understanding correctly what @Bojack meant. What I understood is that if you take a large ensemble of investors starting to invest at different times in the market with the same portfolio and that half of the investors go “all in” and the rest follow a DCA strategy. You will see that after a given time, going all in performs in average better. The average being taken over the investors.

While this informs you on the probabilities/risks of performance for both strategies, for a single investor I don’t find it very relevant. Even if I know that, on average, going all in gives the highest expected returns, I don’t care because I am not an average, I’m just a single person and after going all in, I won’t have any other “chance”.
On the other hand, following a DCA or VCA strategy allows you to take profit of the fact that on average It works better.

I completely agree. That’s what I’m trying to do here. For the moment my plan would be to start with a VCA over 1 year (maybe less if the market goes down or more if it goes up) to invest my current savings and then switch to a DCA where I invest what I save each month. Just doing a DCA would be simpler and maybe would perform better. I probably need to make some simulations to figure that out.

#15

You understood me right. The average statistical return is the best with all-in strategy when we run multiple simulations on historical data. However, the raw average of possible outcomes is not always the appropriate indicator. In economics there is the term of utility, which is your satisfaction level from a given good.

Let’s say you could play a game. You invest 1’000 and you toss a coin. So your chances are 50-50. If it’s heads, you get back 10x what you invested. If it’s tails, you lose what you invested. What if you had to invest 10’000? 1 million? At some point you would just say: nah, I’m good, it’s not worth the risk.

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