Value Averaging

When he was ten years old, Buck put together a list of things he wanted to accomplish by the time he was 30. Now, at the ripe old age of 27, he realizes he has two things left on his list: walk on the moon, and have $10,000 invested. Well, the moon thing doesn’t look like it’s going to pan out, but there’s definitely something he can do about that $10k investment portfolio.

He’s going to get his “value averaging” on, a technique whereby we meet a future investment goal by adding to or subtracting from our portfolio account every month or quarter. Value averaging, or VA, is a strategy designed to help investors reach their goals regardless of whether the market is up or down, and while some say VA produces higher-than-average returns, critics say “nah.”

So...how does it work? Let’s get back to Buck. If he wants $10,000 invested in 36 months, that breaks down to approximately $278 per month. So, in that first month, Buck invests $278. Now let’s say the market goes wild and he ends up making a profit of $150. His Month Two target investment amount is $556 (that’s $278 x 2), but he’s already got $428 in there. Which means that, instead of putting in another $278 this month, he’s only going to put in $128, since that will bring him up to $556. Now let’s say the market falls apart the next month and he ends up losing $250, bringing his account balance back down to $326. Since he’s supposed to be at $834 by Month Three, now he’s going to end up putting in $508.

The goal is that, no matter what the market does, Buck either puts in or takes out the amount of money necessary to keep him exactly on track for his $10k goal.