Value Averaging To Reduce Risk

Many investors are familiar with investing by "dollar-cost-averaging" (DCA), which involves investing a fixed dollar amount at specified intervals, whether the market is up or down. DCA is a powerful tool to encourage systematic savings. It forces investors to buy more shares when prices are lower and fewer shares when prices are high thereby potentially lowering the average cost per share. Value averaging (VA), like DCA, relies on time, rather than timing, to protect the investor from market swings. Under VA, the investor sets a target value for his or her investment at specified periods. Then enough shares are purchased or sold to meet the value target.

VA, unlike DCA, results in varying amounts being invested each period. Under VA, the dollar amount invested and shares purchased will be up when prices are down. Conversely, purchases will be smaller, and sales might occur, if prices rise. VA, however, may be compatible with investors who want to invest a fixed dollar amount every period. These investors could, after careful consideration and reading a prospectus, consider a family of mutual funds and deposit any sums not actively invested into the familyıs money market fund to act as a reserve for future purchases in excess of the fixed amount.

VA is another powerful tool to encourage systematic savings. Some caveats are in order. First, VA requires a more sophisticated investor. Second, transaction costs are a greater factor in VA than DCA. Third, since both purchases and sales are possible, taxes must be considered. Fourth, investors are reminded that dollar-cost and value averaging do not assure a profit and do not protect against loss in declining markets. Finally, since they involve continuous investments in securities regardless of fluctuating price levels of such securities, investors should consider their ability to continue purchases through periods of low price levels.

If you would like to find out more, please give me a call at (315) 363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner