Value averaging.
In plain English
Value averaging is a contribution method that targets a portfolio balance on a set date rather than a fixed deposit amount, so the market decides how much money goes in. The investor sets a value path, such as growing the account by 500 dollars each month, then invests the difference between the target and the actual balance. If the market fell, the contribution is larger; if it rose, smaller, and in strong months the method can call for selling. The trade-off is practical: the required contribution is unpredictable, and it can exceed what a person has available in the worst months.
01Why it matters
The method demands the most money exactly when markets have fallen and cash feels scarcest, which is why it is easier to describe than to run for a decade.
02The math, step by step
Target path: 500 dollars a month. After month one the balance is 500 dollars. Month two the target is 1,000 dollars, but a market drop leaves the balance at 460 dollars, so the contribution is 540 dollars. Month three the target is 1,500 dollars and a rally puts the balance at 1,240 dollars, so only 260 dollars goes in.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
It is not dollar-cost averaging. Dollar-cost averaging puts in a fixed amount every period regardless of price. Value averaging varies the amount to hit a balance target, which means the contribution is unknown in advance and can occasionally be negative.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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