Dollar value averaging

Can you explain the difference between dollar cost averaging and value averaging. Some experts recommend these share buying techniques when a market is falling. Is this right?

Dollar value averaging (DVA) involves adding to your portfolio of shares so that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, when the market falls, you contribute more but when it rises, you contributes less. In contrast to dollar cost averaging, which is based on a fixed amount of money being invested at each period, with DVA you can even not invest in some markets.

Many experts support DVA over dollar cost averaging because when a market falls and shares become more attractive at lower prices you actually buy a lot more shares. On the other hand, when share prices rise and are relatively less attractive you buy less. This method is a little more complicated that dollar cost averaging as you have to do the maths. Many investors like dollar cost averaging because it is more automatic pilot and you can pre-arrange for say $1000 a month to go into buying shares.

What I like about this method is that instead of investing a sum of money all at once, you allocate it over time. So, for example, if at the beginning of the year you had $60,000 you wanted to invest in stocks, you might invest $10,000 every two months over a year instead of plonking it into the market in one go. It means if the market falls by 10% you don't see $6000 disappear in one go.

With DVA you work out your money goal and then you do a bit of work to make it happen. The goal might be based on a 10% return a year and then you have to invest each month to achieve that goal.

In a nutshell, you might nominate a goal of $500K in 20 years time and using a return of say 10% a year you have to increase your investment in bad years when you miss 10% but you can ease up in good years.

Both a good ideas of imposing a discipline into building a portfolio, but most money experts who understand both methods seem to think that DVA is a better method.

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Dollar value averaging

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