The Hidden Gem of Value Averaging
Investing can feel like navigating a stormy sea
A sea full of ups and downs, with no guarantee of smooth sailing. For many, Dollar-Cost Averaging (DCA) is the go-to strategy to stay steady. But there’s a lesser-known approach, Value Averaging (VA), that not only matches DCA’s discipline but adds a clever twist that could make your portfolio shine brighter.
Let’s explore why Value Averaging might just be the hidden gem you’ve been overlooking.
Dollar-Cost Averaging: The Reliable Baseline
DCA is simple and effective. You invest a fixed amount of money at regular intervals—say, $500 every month—regardless of market conditions. When prices are low, you buy more shares; when prices are high, you buy fewer. Over time, this smooths out your average cost per share, reducing the risk of buying at a peak.
It’s like setting an autopilot for your investments, perfect for those who want to stay consistent without obsessing over market swings.
But DCA has a limitation: it’s all about the buy-in. It doesn’t tell you when or how to sell, leaving you to decide what to do when your investments soar—or plummet. That’s where Value Averaging steps in, offering a smarter spin on the same principle.
Value Averaging: Riding the Market’s Waves
Value Averaging takes DCA’s discipline and adds a dynamic edge. Instead of investing a fixed dollar amount each period, VA focuses on achieving a target value that grows at a steady rate—say, $500 each month. Your contributions adjust based on how the market performs, creating a strategy that’s responsive to reality.
Here’s how it works:
On a Downtrend: If the market dips and your portfolio falls short of the growth value path, you contribute more cash to make up the difference. For example, if your goal is a $500 target this month, but the market drops your value by $100, you’d invest $600 to hit the mark. It’s like buying low to scoop up more shares when prices are cheap—an intuitive way to capitalize on dips.
On an Uptrend: If the market climbs and your portfolio grows by $100, then you only need to contribute $400 to hit your $500 growth value path. This is where VA diverges sharply from DCA: it lets the market “contribute” to your target during good times, reducing the cash you need to invest from your pocket.
On an Upward Spike: When the market spikes, the magic happens. If your portfolio grows beyond your target—say, it grows $600—you don’t just sit back and smile. VA prompts you to sell the excess ($100 in this case), locking in gains.
The Hidden Gem: An Exit Strategy Built In
The true brilliance of Value Averaging—what makes it a hidden gem—is its built-in exit strategy. DCA keeps you invested indefinitely, with no clear guidance on when to take profits. VA, on the other hand, systematically cashes out gains when your portfolio exceeds your target.
It’s like having a disciplined partner who whispers, “Take some money off the table,” when things are going too well.
This exit strategy does two powerful things. First, it locks in profits during market highs, giving you cash to reinvest later or use elsewhere. Second, it reduces your exposure to sudden corrections. If the market surges and you sell your excess, you’re less vulnerable when it inevitably pulls back.
It’s a way to “sell high” without trying to time the market—a disciplined, rules-based approach that takes emotion out of the equation.
Picture this: during a bull market, your portfolio consistently overshoots your target. Month after month, you skim off the excess, building a cash reserve while still growing your investments. When the market eventually dips, you’ve got both a lower cost basis from buying more shares on the cheap and a cash pile from those earlier sales. Compare that to DCA, where you’d still be fully invested, riding the rollercoaster with no profits secured.
The Quantelligent Edge: Blending the Best of Both Worlds
Enter the Quantelligent strategy, a brilliant hybrid that combines the steady rhythm of DCA with the profit-capturing savvy of VA. With Quantelligent, you invest like DCA—putting in a fixed amount regularly to build your portfolio with discipline, smoothing out market volatility over time. But when the market spikes and your portfolio surges beyond your goals, it flips to VA mode, prompting you to sell the excess and pocket those gains.
This blend is genius because it times the market without actually timing it: DCA’s consistency grows your wealth steadily, while VA’s profit-taking captures highs automatically, letting you benefit from market surges without guessing peaks.
To learn more about the engineers behind Quantelligent and how they have automated the strategy, visit LymanWealth.com.
