#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.