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Value Averaging: How This Investing Strategy Works

Unlike dollar-cost averaging, where you invest the same amount every period, value averaging adjusts how much you invest each period to hit a target account value. This is general education, not investment advice.

  1. What value averaging is

    Value averaging (VA) is different from dollar-cost averaging (DCA), where you invest the same fixed amount every period. Instead, VA adjusts how much you invest each period so your account's value tracks a pre-set target growth path.

  2. Setting a target growth path

    First, decide how much you want your account's target value to grow each period. If you set a target increase of $300 per month, for example, your cumulative target would be $300 after month one, $600 after month two, $900 after month three, and so on.

  3. Buying more when prices fall

    If the market drops and your current account value comes in below the target, you invest extra that period to close the gap and catch up to the target path β€” which means buying more when prices are lower.

  4. Sometimes selling when prices rise

    Conversely, if the market rallies hard and your account value overshoots the target, value averaging can call for selling off the excess to bring the balance back down to the target path β€” meaning it can require selling decisions more often than a fixed contribution plan.

  5. How it compares to dollar-cost averaging (DCA)

    DCA is simple: invest the same amount every period, no math required. Value averaging aims for a theoretically lower average cost per share, but it requires a calculation every period, and during a long bull market it can mean investing less β€” or selling more often than feels comfortable.

  6. You need cash on hand for extra buying

    If a downturn drags on, the extra amount needed to catch up to the target path can keep growing. Actually running a value averaging strategy means planning for the possibility that you'll need to invest significantly more than expected in a given period.

  7. Things to keep in mind

    Some historical backtests have found value averaging outperforming simple periodic investing, but those results reflect specific market conditions in the past and don't guarantee future returns. This page explains the mechanics of the strategy for general financial education and is not investment advice.

A simple worked example

Say you set a target monthly increase of $200. After month one, your target value is $200. If the market fell and your actual balance came in at $150, your month-two target would be $400, so you'd invest $250 that month ($400 minus $150) to catch up. If instead the market rose and your balance already exceeded $400, you'd invest less that month, or sell off the excess.

General education, not investment advice

This page explains the structure of the value averaging strategy in plain terms and does not recommend investing in any particular stock or at any particular time. All investing carries the risk of losing principal, so weigh any strategy carefully before using it.

Frequently Asked Questions

Does value averaging always outperform dollar-cost averaging?

No. Some backtests over specific historical periods have shown favorable results for value averaging, but outcomes depend heavily on market conditions β€” during a long bull market in particular, the frequent selling it calls for can actually create an opportunity cost.

Do I really have to do the math myself every period?

Tracking your target path alongside your actual account value in a simple spreadsheet makes the monthly buy or sell amount easy to calculate. That said, it does take more time and attention than a fixed contribution plan, so weigh that trade-off against your own preferences before choosing between the two.