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Value averaging?

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NotSure
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Value averaging?

#501814

Postby NotSure » May 20th, 2022, 7:55 pm

Browsing the WSJ I came across the following article on 'value averaging' that piqued my interest. (Hopefully the link avoids the paywall).

It discusses a variation on 'dollar cost averaging' but I'd be interested if anyone has analysed it (1nvest?). I am attracted to 'mechanical' investment techniques (e.g. HYP, but that is not my particular 'bag'). That is, I am aware I am not a good stock-picker, but find 'pure' passive just a little boring.

https://www.wsj.com/articles/buying-the-dips-value-averaging-11653058860?st=tpop90dxxwgj0hr&reflink=desktopwebshare_permalink

How to Face Up to Buying the Dips

.......In value averaging, you set a target amount by which you want your account to grow each period. Say you want to end each month with $1,000 more than you started with.

In periods when stocks fall, you have to add enough to your holdings to hit the target you’ve set.

If, for instance, the value of your portfolio falls $250, you would need to buy $1,250 in stocks to finish the month with $1,000 more than you had at the beginning. If your portfolio’s value drops $500, then you’d add $1,500, and so on.

In a rising market, you’d buy less than $1,000—and even sell some, if stock prices go through the roof.......

BT63
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Re: Value averaging?

#501830

Postby BT63 » May 20th, 2022, 8:48 pm

I reinvest dividends and other surplus income using monthly purchases of index funds on five different dates (1st, 8th, 12th, 22nd, 27th - they just happen to be reasonably well-spaced dates that my providers offer).

When markets are rising, I gradually reduce how much I reinvest each month and put the excess into cash savings. I did this through 2021, ending 2021 with around 20% being reinvested and 80% going to cash.

When markets are falling, I gradually increase how much I reinvest each month up to the maximum average monthly surplus. I did this in early 2020 and have begun doing this in the last few months, currently reinvesting 60% and sending 40% to cash, changed from 20%+80% six months ago.

When markets take a vicious beating (bear market), I gradually invest the cash built up from under-investing in rising markets. I did this during the Covid crash and it's looking quite possible I'll be doing it again in 2023-24.


But even the 'invest a fixed amount each month, adjusted upwards annually according to inflation or pay rises' is a very effective long-term strategy.

JohnW
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Re: Value averaging?

#501858

Postby JohnW » May 21st, 2022, 12:36 am

https://www.bogleheads.org/wiki/Value_averaging
There’s also a book on it by Edleson. Haven’t read it.

vand
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Re: Value averaging?

#501907

Postby vand » May 21st, 2022, 11:17 am

Yep, I've come across the concept. In practice it can be hard when your portfolio grows to the point where your monthly contributions are a smaller percentage of the overall portfolio size.

But I like the idea that when the market is down you try to do everything to buy more in absolute dollar terms.

NotSure
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Re: Value averaging?

#501910

Postby NotSure » May 21st, 2022, 11:26 am

vand wrote:Yep, I've come across the concept. In practice it can be hard when your portfolio grows to the point where your monthly contributions are a smaller percentage of the overall portfolio size.

But I like the idea that when the market is down you try to do everything to buy more in absolute dollar terms.


Yes - I though about it a bit more after I posted. Basically, it means catching every falling knife, plus lots of selling (or at least greatly reduced investment) during a bull run. May work in volatile, sideways-trending times (which were once quite common, and may be again going forward), but I suspect there is less to it than meets the eye. Think I'll stick to DCA for now. Like yourself, the 'buy more after a dip' appeals to me more than the 'sell the rip'.

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Re: Value averaging?

#501956

Postby AWOL » May 21st, 2022, 1:51 pm

Doesn't rebalancing do something very similar in practice?

Also what do you do with the excess money that you are not investing during a prolonged rally?

Isn't this very similar to building cash/bond reserves during a equity rally?

BT63
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Re: Value averaging?

#502034

Postby BT63 » May 21st, 2022, 7:24 pm

AWOL wrote:Doesn't rebalancing do something very similar in practice?


I would rather follow the Permenent Portfolio technique than the value averaging suggested in the opening post which I can see running into problems (insufficient earnings to add more money in bear markets, too much cash in bull markets, or in times of inflation).

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Re: Value averaging?

#502073

Postby vand » May 22nd, 2022, 9:55 am

AWOL wrote:Doesn't rebalancing do something very similar in practice?


Not the same thing at all.

Rebalancing is the practice of managing the internal structure of the portfolio.

Cost averaging or value averaging is the practice of managing cashflows in/out of the whole portfolio. In value averaging you adjust the cashflow according to the return in the most recent time period.

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Re: Value averaging?

#502079

Postby AWOL » May 22nd, 2022, 10:11 am

vand wrote:
AWOL wrote:Doesn't rebalancing do something very similar in practice?


Not the same thing at all.

Rebalancing is the practice of managing the internal structure of the portfolio.

Cost averaging or value averaging is the practice of managing cashflows in/out of the whole portfolio. In value averaging you adjust the cashflow according to the return in the most recent time period.


Rebalancing while investing regularly also has this effect of increasing the amount that goes into risk assets when they are cheap. What happens to the cash that isn't invested? The problem is that in the long term the best strategy is usually to invest cash now not to pound cost average, the exception being falling markets.... IF you are lucky enough with your timing.

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Re: Value averaging?

#502105

Postby EthicsGradient » May 22nd, 2022, 12:14 pm

I got the S&P monthly total return figures since Feb 1988, and the US CPI figures, and did a spreadsheet, comparing:

regular investing starting at $100/mth in 1988, increasing by the CPI;

and value averaging with a target rate of 0.32% above CPI/mth (which works out at 3.9% pa - close to the "4%" some reckon you can take as a long term income from investments) for the existing investment, and the same regularly invested amount added each month; and then working out the amount taken off as profit, or added in to reach the target. The excess/amount "borrowed" to do this is subject to interest at the CPI rate

Even though that involved borrowing substantial amounts at the bottom of the worst crash (by Feb 2009, the regular investing was worth $48,886; the target figure was $69,845, but you would have had to borrow $28,575 to reach that), the plain regular investing stayed substantially ahead after small variations in the first few years.

I also ran that from Jan 2000, to see what happened if you start shortly before a crash, rather than a long bull run. This time, the value averaging method settled down into a modest lead (typically around $200) between 2004 and 2008; then the lead changed hands until Sept 2009 (during which, value averaging required borrowing up to $9,750); then value averaging came out on top again, building up its lead to about $2,700 by August 2013 (about $32,600 v. $29,900; and by which time all the borrowed money had been paid back). Then the next long bull run allowed the plain regular investing to pull ahead again (it drew level in late 2017). By the start of May 2022, it's $119,274 for plain, and $72,588 for the target, with $37,219 built up in reserve - so plain is $9,467 ahead (down from a peak lead of $19,505 in Dec 2021).

So, as people have said, if you used this as a long term strategy, you'd have to be prepared to use extra money to keep it going at the worst times (if you'd had to use regular saving to build that up, in both cases the monthly amount would have had to be comparable to the amounted invested in stocks); and it can still end up behind, even with a crash near the start, another a third of the way through, and a dip at the end (I think a fall of another 20% in the S&P 500 would bring them back roughly equal). It works OK in mixed times, but not in bull runs, and if you could foresee when those start and end, there would be better strategies.

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Re: Value averaging?

#502114

Postby vand » May 22nd, 2022, 12:34 pm

AWOL wrote:
vand wrote:
AWOL wrote:Doesn't rebalancing do something very similar in practice?


Not the same thing at all.

Rebalancing is the practice of managing the internal structure of the portfolio.

Cost averaging or value averaging is the practice of managing cashflows in/out of the whole portfolio. In value averaging you adjust the cashflow according to the return in the most recent time period.


Rebalancing while investing regularly also has this effect of increasing the amount that goes into risk assets when they are cheap. What happens to the cash that isn't invested? The problem is that in the long term the best strategy is usually to invest cash now not to pound cost average, the exception being falling markets.... IF you are lucky enough with your timing.


It's a bit of a moot point, because what most people refer to as monthly cost-averaging is actually mini lump-sum investing.

Why? Because you don't have your full year salary ready to hand right now. You only have what you have been paid in the last month, and from that you put into the markt the amount you want to invest.

A real cost-average scenario implies that you have the amount you want to invest available up front.

In the real world most of us accumulate most of our investments over our working careers.

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Re: Value averaging?

#502167

Postby AWOL » May 22nd, 2022, 4:24 pm

In the situation of a salary, people don't consider whether they should invest out all at once or as regular sums. Pound cost averaging is the frequently given answer to the question of "should I invest a lump sum all set once and risk it losing value? "

Value averaging is described as " two basic ideas: dollar-cost averaging (putting money to work automatically every month or quarter) and rebalancing (selling some of your winners and buying some of your losers). " so not irrelevant.

To make this technique work you need to be able to find enough to drive growth in a major direction. This is easy during the first twelve months of accumulation. But few people can find the six figure sums that a significant portfolio may need to grow by $100 our whatever your monthly target is during a crash. Alternatively holding large amounts of cash does well if timed to precede a crash but generally kills returns.

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Re: Value averaging?

#502190

Postby vand » May 22nd, 2022, 7:16 pm

AWOL wrote:In the situation of a salary, people don't consider whether they should invest out all at once or as regular sums. Pound cost averaging is the frequently given answer to the question of "should I invest a lump sum all set once and risk it losing value? "

Value averaging is described as " two basic ideas: dollar-cost averaging (putting money to work automatically every month or quarter) and rebalancing (selling some of your winners and buying some of your losers). " so not irrelevant.

To make this technique work you need to be able to find enough to drive growth in a major direction. This is easy during the first twelve months of accumulation. But few people can find the six figure sums that a significant portfolio may need to grow by $100 our whatever your monthly target is during a crash. Alternatively holding large amounts of cash does well if timed to precede a crash but generally kills returns.


No, you are still conflating 2 basically separate ideas.

- Rebalancing is based around the idea of asset allocation.
- Cost/value averaging is based around the idea of mechanically buying to take advantage of fluctuations in price.

Now, granted, you can use your monthy buying to effectively rebalance also, depending on how the structure of the portfolio has changed, and effectively kill two birds with one stone, but they are still 2 separate principles.

But for those who only invest in one thing (eg 100% total stock market) there is no such concept of rebalancing. And for those of us with no additional cashflows to worry about (eg no dayjob), there is no need for a buying strategy.

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Re: Value averaging?

#502198

Postby AWOL » May 22nd, 2022, 8:55 pm

The quotes are from the article. Not my definitions.

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Re: Value averaging?

#502869

Postby Gilgongo » May 26th, 2022, 7:34 am

BT63 wrote:When markets are rising, I gradually reduce how much I reinvest each month and put the excess into cash savings. I did this through 2021, ending 2021 with around 20% being reinvested and 80% going to cash.


As a footnote to this, a lot of people do the opposite during decumulation/drawdown in order to avoid sequence of returns risk in the first 10-15 years of retirement. I'm a bit of a fan of practical - as opposed to just effective - strategies over the long term, and to get into the habit of monitoring the markets to modify your actions to some extent may be good practice for the future.

Personally, I just have a figure in my spreadsheet next to each asset that indicates the percentage difference in its price now compared to six months ago, and act accordingly.


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