Dollar value averaging

Dollar value averaging (DVA), sometimes called value averaging (VA), is a strategy popularized by Edleson in a book first published in 1993 and now reissued. According to Edleson, "The rule under value averaging is simple: ... make the value not (the market price) of your stock go up by a fixed amount each month."

DVA uses mathematical formula to control the amount of money invested in a portfolio over time. DVA uses spreadsheets to determine how much to allocate to various asset classes. Unlike dollar cost averaging, the amount being invested varies with the value of the portfolio. If the market goes down, more money will have to be invested to bring the portfolio value up to the scheduled amount. Conversely, if the market rises, less money will have to be invested. In the case of very high market performance, selling assets may be required to bring the portfolio value down to the scheduled amount. This has the effect of purchasing even more assets than usual in bear markets and buying less - even to the point of selling assets - in the case of bull markets.

Accumulation Phase
The investor begins by determining the size and frequency of their regular contributions, as well as a realistic estimate of the return generated by the entire portfolio. For example, an investor with a portfolio worth $10,000 decides that they will contribute $1,000 four times per year to their portfolio, and expects an annual return of 5% - equivalent to a quarterly return of 1.25%.

At the end of the first quarter, the expected value of the portfolio is calculated as follows:


 * $10,000*(1+.0125)+$1,000=$11,125

Regardless of the actual performance over this period, the investor will add enough money to bring the market value of the portfolio to $11,125. If the portfolio performed exactly as expected, the investor would contribute $1,000. If the portfolio under-performed, the amount added will be greater than $1,000. If the portfolio over-performed, the amount added will be less than $1,000. If the portfolio significantly over-performed, it may be necessary to sell in order to bring the market value of the portfolio in line with the expected value. This process is repeated each time the investor adds to the portfolio.

During periods of over-performance, excess cash is kept in a HISA (High-Interest Savings Account) or equivalent to be used during periods of under-performance.

Rebalancing
If the portfolio contains multiple asset classes, they will be rebalanced back to target allocations each time money is added to the portfolio. Suppose the investor in the above example has a target allocation of 40% bonds and 60% equities. When money is added at the end of the first quarter, the investor will rebalance as follows:


 * Bonds: $11,125*0.4=$4,450
 * Equities: $11,125*0.6=$6,675

In practice, this results in more money being added to under-performing asset classes and, potentially, a lower average cost per share.

Withdrawal Phase
Dollar value averaging can be used in reverse during the withdrawal phase, where the amount withdrawn will be greater during periods of market over-performance.

Spreadsheets
The Excel files that accompany Edleson's book are available, Excel Files for VA Book.xls.