What is Value Averaging?
Value averaging (VA) is an investment strategy where you adjust your contributions to ensure your portfolio follows a predetermined growth path, rather than investing a fixed amount at regular intervals as with dollar-cost averaging. At each investment period you set a target portfolio value based on your investment goals, then contribute more if your portfolio lags behind this path or less if it’s ahead.
A distinctive feature of value averaging is that when your portfolio grows faster than your target value path, you actually withdraw the excess-cashing out the overage-rather than continuing to invest. This contrasts with other strategies, as it systematically locks in gains during strong market performance by moving profits into cash or a less risky asset, which can then be redeployed if the portfolio later falls below the target.
This dynamic approach means you buy more when prices are low and less, or even sell, when prices are high, aiming to capitalize on market volatility and maintain disciplined progress toward your financial goals. Over time, this method can potentially lower your average cost per share and help you avoid over-investing during market peaks or under-investing during downturns.
However, value averaging requires careful planning, ongoing monitoring, and often a separate cash reserve to manage withdrawals and reinvestments as needed. While some studies suggest it may offer higher returns in volatile markets, the strategy’s effectiveness depends on market conditions and strict adherence to the value path.