Contents

Value averaging

There are 2 possibly useful spreadsheets. One from VA Chapter 4, one from VA Chapter 5. I downloaded the comprehensive spreadsheet. An illustrative example would be very helpful to supplement the quote box.

—LadyGeek 17:08, 11 August 2011 (EDT)

Since I do not have excel, you might want to provide an example. I have saved an image of a comparison chart (VA vs. DCA) but it is copyrighted.—Blbarnitz 18:01, 11 August 2011 (EDT)

The Excel file works in LibreOffice (freeware similar to Open Office) and imports cleanly into Google Docs. In-lieu of an Excel example, it might be better to describe the process in more detail (the quote box may be too complicated for those without a math background). The Gummy stuff reference explains how value averaging can have a large impact on your contributions in a volatile market, which is not emphasized in the other references.

I see the comparison chart, it should be straight-forward to replicate using a spreadsheet with different inputs. The Gummy stuff reference also has an instructive spreadsheet which looks useful — it’s standalone and designed to compare DCA with value averaging.

There’s also comparisons between DCA and lump sum (moneychimp.com).

I’ll take a crack at it. —LadyGeek 09:49, 13 August 2011 (EDT)

The Value Averaging spreadsheets (exponential plots) didn’t show what I felt was a clear, easy to understand, example of how this works. The Investopedia table was much better. I used the Investopedia spreadsheet (Choosing Between Dollar-Cost And Value Averaging ) to confirm my methodology, then expanded and reorganized the table. I did some experimenting with the market price. I did 2 cycles (increase, decrease over time) to see what happens to the periodic Value Averaging contribution.

Does this sound OK to put in the wiki article? It’s based on the spreadsheet. -

You have to be careful in a declining market, as you will need to have additional funds. As time progresses, you will need even more funds to reach the amount required for the chosen period. If the market is volatile near the end of the investing time frame, you will need a lot of funds. This may catch investors unprepared for this additional expense.

This file was imported from Excel, conditional formatting was dropped. Google Docs won’t conditionally format based on cell value. I had the cells flagged where the required investment amount (Column G) was greater than planned.

If you change the market price for Period 12 from $11.00 to $14.00, the Amount Invested During Period goes negative. Gummy stuff’s article says this may happen. I’m not sure what it means (sell shares?).

The formula for Value Averaging, V_t = C * t * (1+R) t. is a rearrangement of the Time Value of Money equation.

—LadyGeek 17:45, 13 August 2011 (EDT)

My tentative set of discussion points regarding VA:

1. VA adds a growth factor (by formula, consisting of estimates of both the investment’s return as well as growth in the contribution level) to the regular periodic investment of savings flows. If an investor’s contribution amount is not likely to grow, this factor should be set at 0% so that estimated investment growth is the residual growth factor.
2. VA may require both purchases and sales of the underlying investment, based on the investment performance of the investment. The strategy requires a cash account for holding prospective purchases as well as any sales proceeds.
3. VA sales may require realizing taxable gains. Thus, one might restrict the strategy to tax advantaged accounts; or alternately, adopt a policy constraint forbidding sales in the taxable account.
4. You have to be careful in a declining market, as you will need to have additional funds. As time progresses and the account value grows, you will need even more funds to reach the amount required for the chosen period. If the market is volatile near the end of the investing time frame, you will need a lot of funds. This may catch investors unprepared for this additional expense.
5. VA most often provides a lower average cost per share than does DCA, and also provides for a higher IRR. This does not, however, mean that VA will result in a higher net return.—Blbarnitz 18:28, 13 August 2011 (EDT)

Neutrality

There is forum disagreement on the neutrality of this article, discussed in Finally! Can we lay DCA to rest and ban this topic forever?. Based on comments here. (forum member) umfundi has PM’d me with a suggested update shown below; additional suggestions are forthcoming.

Also, (forum member) petrico suggests there is a bias from a psychological perspective, as described here.

Overview

Dollar cost averaging (DCA) [1] is a consequence (bias: correct definition requires technique ) of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. [2] If the price of the investment fluctuates, the average cost will be lower than the average price. For example, invest $6 per month in a stock that has prices of $1, $2, and $3 in three different months. The average price is $2; the average cost (11 shares for $18) is $1.64. Note that this result does not depend on the trend of the prices; they may occur in any order. DCA is not market timing.

Most investors take advantage of the price averaging phenomenon of DCA by making regular investments, particularly by payroll deductions to fund IRA, 401(k), or other long-term investment vehicles. This is known as systematic periodic investment. It is important to note that these systematic plans make the investments as soon as the money is available. As Ric Edelman (The Truth About Money, pp. 274-281, 1998) and others have observed, such systematic periodic plans maximize expected returns, because the money is invested as soon as it is available.

Value averaging is a variant of dollar cost averaging. It is problematic in that it requires a varying investment amount, and in that it requires much more attention, discipline, and fortitude than DCA does.

Systematic periodic investment should be the cornerstone of any investor’s strategy. It will result in dollar cost averaging. Note that DCA systematic periodic investment is not a market timing strategy. Rather, it provides some psychological insulation for investors in fluctuating markets.

The term “Dollar Cost Averaging” has also been used by some to denote a strategy for market timing. Here, DCA is opposed to “Lump Sum Investing”. Given a lump sum, should I invest it immediately, or trickle my investments over some period of time? Trickling a lump sum is market timing. To call it DCA is confusing and a disservice to novice (or all) investors who should be making systematic investments. (most (?) of us consider the DCA decision as Given a lump sum, should I invest it immediately, or trickle my investments over some period of time)

References

(put citations here as placeholder for main article)

(edits removing bias and distortions) —Blbarnitz 13:46, 9 October 2011 (EDT)

(edits — added thread link). Original edit was at 16:04, 9 October 2011, but forgot to add my signature. —LadyGeek 14:27, 9 October 2011 (EDT)

Note that the current page is an expansion of an original page, Lump sum vs DCA (incorporated as a section in the current page) which accounts for the point of view in this segment of the page. —Blbarnitz 14:37, 9 October 2011 (EDT)

Typo fix. Clarification of the first sentence:

Dollar cost averaging (DCA) [1] is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.

↑ In the UK this technique is called Pound cost averaging. see The Benefits of Pound Cost Averaging. Morningstar

—LadyGeek 15:17, 9 October 2011 (EDT)

Reordered paragraphs based on an email from umfundi. Content is unchanged. Should we mark the page with the Neutrality flag? —LadyGeek 15:37, 9 October 2011 (EDT)

Neutrality II

Section showing revisions suggested by Petrico:

Dollar cost averaging versus lump sum

When you are ready to invest money, a common question is whether you should invest it as a lump sum or Dollar Cost Average (DCA) by splitting your investment across several payments. The answer depends on your psychology aversion to loss.

In most cases, you are moving your money from cash (or the equivalent, a low-yielding money market ) to some mix of stocks and bonds. The expected value of both stocks and bonds are higher than cash. However, their volatility is higher as well. The risk is that just after making your investment, the market could crash, causing you to feel bad that you invested when you did. The risk is that just after making your investment, the market could crash, causing your investment to lose value due to the unfortunate timing of your purchase.

Of course, according to Bogleheads Investment Philosophy. you should only be investing in the first place into a diversified asset allocation. Also, you should only be holding volatile funds like stocks and bonds if your investing horizon is long enough to ride out their volatility.

For a completely rational investor, l [L]ump sum investing will always produce a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article, [1] studies indicate that lump sum investing has produced higher returns 66% of the time.

Some investors have the goal, not of maximizing their expected returns, but of minimizing their potential regret loss. For those investors, dollar cost averaging is superior because it reduces the chances of investing just prior to a market drop. If you instead decide to invest 1/6th of the money each month for 6 months, you will reduce the chance of buying just before a crash. Instead, as the price fluctuates each month, you will buy more shares when the price is low and less when it is high.

Many new investors are more interested in minimizing their potential regret loss, and it’s important that an ill-timed market drop not scare them off from investing in the future. Many experienced investors are more interested in maximizing their expected returns. You can also decide to split the difference, where you invest half immediately and the other half over 6 or so months.

References

—Blbarnitz 06:06, 10 October 2011 (EDT)