Value Averaging. Any practicionors?

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sopogah
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Value Averaging. Any practicionors?

Post by sopogah »

Hi Bogleheads.

I just finished reading the book "Value Averaging" by Michael Edleson. It is very intriguing, although challenging for the mathematically uninclined. In a nutshell, it is a modified form of DCA (dollar cost averaging), that varies the amount invested (every month or quarter or 4months, etc.) based on predetermined periodic investment valuation, and can involve some selling at higher valuations.

I like to hear comments from anybody who practices this principle, or has an opinion about it.

Jack
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Joshv02
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Post by Joshv02 »

I'm still in the process of putting together a plan, but I've been intrigued and reading about DVA.

FWIW, I've been playing around with www dot valueaverager dot com, though I know little about it.
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Post by avalpert »

I use it sort of - I use the value path to track progress but I don't neccesarily buy/sell off of it. The reason is because the value path is highly dependent on your assumptions and starting position - paticularly future rate of return, contribution rate and ending value. Since the value I am targeting is flexible I tend to adjust that over the other variables you control though at times I have adjusted my contribution level.
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Post by jeffyscott »

Also a "sort of" here. What I think I am doing is sort of a combination of value averaging and opportunistic rebalancing.

I have target allocations set in dollars, rather than percentages. When a fund gets too far off the target allocation, I buy or sell to move toward the target. The dollar amount for each target allocation gradually increases.

(As an additional factor, valuations can potentially affect our allocations)
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financialguy
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Post by financialguy »

I hate to troll this thread, but whenever I've backtested value averaging, I've found it to hurt returns. You miss out on the big gains in the up years, and then on the down years your cash reserve gets depleted really fast. So I would really recommend studying this strategy in depth before engaging in it.
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Post by numericalexample.com »

I try to do dollar cost averaging but I do not buy every month, only once a year at the end of October. The problem is that my salary is somewhat correlated with the stock market, in good times I have more to invest than in bad times.
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sopogah
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Post by sopogah »

Thanks to everybody for their input.

Edleson in the book mentions that there are as many Value Averaging ways as there are investors. My guess is, that it can be useful for the very disciplined investors, who do not mind buying on dips, when everybody is scared, and selling on rallies, when everybody is euphoric.

It can be modified to include no sell at all, especially in taxable account.

A spreadsheet can be downloaded from the website that was mentioned in the book, by plugging in few numbers, the investor can see a road map to the desired target. Very useful indeed. At least, I find it very educational.

Jack
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Post by tetractys »

Studied value averaging for awhile and came to the conclusion that rebalancing a slice and dice portfolio accomplishes, essentially, about the same thing. -- Tet
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Post by superlight »

I do, but that is kind of a cheat, because I've only just started. I'm going for a conservative 50:50 stock:bond portfolio, over 5 years, with quarterly additions. I used r=9% g=3.5% (annual rates), but that seems like the hardest and most arbitrary part of the process.

I did back-test, using some stupid programs of my own. I only had quarterly data for Vanguard's total stock market and total bond market funds. I used those, looking at the distribution of outcomes for five year periods starting in 1998 ... 2003. I liked the results, though that might be a bit subjective.

One thing that is odd, but seemed to help the outcomes ... I set a cap on total investment, and stopped when that dollar value was contributed to the plan. It seemed the distributions were similar when I stopped throwing money into the worst conditions.

FWIW Financial Guy, I believed these guys:

"A Statistical Comparison of Value Averaging vs. Dollar Cost Averaging and Random Investment Techniques"

http://www.studyfinance.com/jfsd/pdffil ... rshall.pdf

[note, i'm a middle aged guy starting with a lump-sum, which gives me different concerns than, say, a young monthly contributor]
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Post by Random Musings »

It's interesting that during bear markets how many "strategies" like value averaging and 200 day MA (and I'm not arguing against various momentum studies that have merit but, IMO are difficult for the average investor to exploit) will provide a better solution than the generally simple diversify and rebalance strategies that are generally preached here.

The problem is, you will see the various specific "success" stories, but don't hear of all the failures. And, if these strategies were truly useful, why don't our experts use them (besides investing in certain DFA funds with the economies of scale to take advantage of certain situations)?

There are always systems that have beat the markets as of today; however picking the winning ones moving forward is a game of chance and the odds are not 50/50, but far worse.

Don't confuse success with a flawed investment strategy.

RM
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Half value, half growth, rebalance every 2 - 6 months

Post by djw »

What I do is maintain half of my domestic investment money in Vanguard value index funds and the other half in growth index funds. Every 2 - 6 months I rebalance by selling some shares of the winners and buying some of the losers (unless I have new money, which I always add to add to the "loser" funds). So, I figure I'm always selling higher and buying lower.

I know that "momentum" investors tell you to sell losers and let your winners ride, but they're usually referring to individual stocks or managed funds. I have no problem doing the opposite with respect to index funds. I have faith in reversion to mean and a long time horizon to wait for it to come to pass.

I also have nearly 40% of my total portfolio in fixed income (mostly individual bonds, including TIPS). I can't imagine having 90% in equities... to much risk for me. I don't believe in overweighting value either.
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Post by captain3d »

I am giving it a go since the beginning of this year. I am using foliofn dot com for a taxable account which allows you to build your own 'fund of stocks' and trade often for a fixed fee. I buy Index ETF's in my case.

I am using a diversified allocation based on fundadvice dot com recommendations which has returned almost 14% over the last few decades.

My plan allows me to add $1000 a week and I calculated a Value path that is based on a 14% gain as well as the addition of the $1000. Yes I know 14% is very optimistic going forwards but thats ok with me as it will bias towards investing more.

Each week I buy enough of the ETF's to hit my Value path. The amount can swing dramatically especially lately between $900 and $2700 so far. No need to sell in these down markets of course ;-)

Foliofn lets me buy in a way that rebalances my funds to my original targets eg buy more of those that are down. But I have elected to buy equally so that high flyers get as much money as the fallers. The more I buy the more out of balance my allocation becomes.

At some point I should have to sell to hit my Value path - hopefully. In that case I intend to sell to rebalance taking the cream off the top.

I am fundamentally an index investor but one with a bad habit of trying to do some thing 'clever' like try some stock options etc. This almost always ends badly ;-)

Value Averaging satisfies my desire to poke and follow the numbers while keeping me in the indexes for the long term I hope.

phil
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Post by yobria »

I think VA presents a philosophical question: How does the savvy investor respond to a novel, complex investment scheme (or product) like this which he doesn't fully understand, and which few have used successfully? My answer: fuggetaboutit. Keep it simple and stick to the tried and true basics.

Nick
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Post by Wagnerjb »

Random Musings wrote:It's interesting that during bear markets how many "strategies" like value averaging and 200 day MA (and I'm not arguing against various momentum studies that have merit but, IMO are difficult for the average investor to exploit) will provide a better solution than the generally simple diversify and rebalance strategies that are generally preached here.

The problem is, you will see the various specific "success" stories, but don't hear of all the failures. And, if these strategies were truly useful, why don't our experts use them (besides investing in certain DFA funds with the economies of scale to take advantage of certain situations)?

There are always systems that have beat the markets as of today; however picking the winning ones moving forward is a game of chance and the odds are not 50/50, but far worse.

Don't confuse success with a flawed investment strategy.

RM
Great post. I second everything you said.

Best wishes.
Andy
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Post by superlight »

Do I understand correctly, that some of you are asserting that value averaging is flawed?

That's not the way I read "A Statistical Comparison of Value Averaging vs. Dollar Cost Averaging and Random Investment Techniques" ... though there is an important point to be made:

All of our back-testing will give us distributions of results, for past conditions. None of us knows future conditions. So we choose a past performance we are comfortable with and, like all investors everywhere, take our chances.

(I certainly don't think there is any data that value averaging is especially flawed compared to all the others, in this context. You may lose the low-probability high-gain scenarios that come with a lucky lump-sum investment ... but you also lose the low-probability high-loss scenarios that come with an unlucky lump-sum investment.)
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Post by superlight »

BTW, if you are relying on back-test models that lump-sum at some arbitrary point (1930 ... 1970, 1980, ..) and then rebalance ... if that is not what you really do, you aren't really modeling your plan.

We fall in two categories, those making regular investments from salaried income, and those of us with "lumpy" income (and rising or falling investment monies).

[I'm "lumpy" and VA for that reason.]
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Post by yobria »

superlight wrote:Do I understand correctly, that some of you are asserting that value averaging is flawed?
My position is there's no free lunch or extra benefit from VA. Going forward, the more risk you assume, the more long term return you should expect. If your VA strategy causes you to hold more cash, well, less risk and less return. So instead of this complex strategy that will cause your risk profile to bounce around over time, why not just set a fixed AA and stick to it?

Nick
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Post by PatrickS »

I'm using modified value averaging to get into reits. Vanguard's frequent trading policies make true value averaging hard to do, so I buy more when low, but don't sell when I'm above target. I put together a 43 month plan to arrive at my targeted allocation, and buy enough each month to get to my target.
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Post by superlight »

If your VA strategy causes you to hold more cash, well, less risk and less return.
"less risk, less return" implies a certainty, a singular outcome, rather than a distribution.

Sometimes less risk will give higher return (in a long term bear market) and sometimes it will not.

The data, in that PDF, seem to say ... well in their words:
As the title suggests, this paper compares two “formula” or mechanical investment techniques, dollar cost averaging and a relatively new proposal, value averaging, to a form of random investing to determine if any technique yields superior investment performance. Results indicate that value averaging does provide superior expected investment returns when investment prices are quite volatile and over extended investment time horizons with little or no increase in risk. These results are quite surprising based on other research supporting the Efficient Market Hypothesis and the fact that any actual performance attributed to value averaging does not result from any temporary inefficiency in market prices.
In my opinion, when you back-test you have to look at the distribution of outcomes and decide what you are comfortable with. Which is better?

-20% X
-10% XX
+00% XXX
+10% XXXX
+20% XX

or

-20%
-10% X
+00% XXX
+10% XXX
+20% X

For me, in capital preservation phase of my life, I'll take some hits to the high gain in return for reduced downside risk. I don't think higher possible return, with higher risk, is better for everyone.
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Post by yobria »

superlight wrote:
The data, in that PDF, seem to say ... well in their words:

As the title suggests, this paper compares two “formula” or mechanical investment techniques, dollar cost averaging and a relatively new proposal, value averaging, to a form of random investing to determine if any technique yields superior investment performance. Results indicate that value averaging does provide superior expected investment returns when investment prices are quite volatile and over extended investment time horizons with little or no increase in risk.
Every investment scheme I've ever seen involves a backtest with a free lunch. Using the right rules and dates, you can produce any results you want. The question is: What do you expect going forward?
superlight wrote:
In my opinion, when you back-test you have to look at the distribution of outcomes and decide what you are comfortable with. Which is better?

-20% X
-10% XX
+00% XXX
+10% XXXX
+20% XX

or

-20%
-10% X
+00% XXX
+10% XXX
+20% X

For me, in capital preservation phase of my life, I'll take some hits to the high gain in return for reduced downside risk. I don't think higher possible return, with higher risk, is better for everyone.
So increase your bond allocation. Ever heard the phrase "Keep It Complex Stupid"? Probably not - humans don't have to be reminded to overcomplicate things.

Nick
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Post by superlight »

I think I have a less-than-average trust in backtesting, for this crowd.

But how do you make any assertion without it? Your "less risk, less return" is not a natural law. It comes out of historic data itself, and is at odds with "past performance does not guarantee future results."
So increase your bond allocation.
I have a high bond allocation, but I don't think anyone has shown that a high bond allocation defeats bad luck in equity investment.

We are talking about two different things here, though they have overlaps. One is your allocation, and one is your method of entry.

Method of entry can shape your cost basis.
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Post by superlight »

Think about it this way, if your hold is 30 years, why is a dice-roll the best starting point?

Why shouldn't VA for 5 years and hold for 25 years reduce risk of an extreme entry point?
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Post by yobria »

superlight wrote:Think about it this way, if your hold is 30 years, why is a dice-roll the best starting point? Why shouldn't VA for 5 years and hold for 25 years reduce risk of an extreme entry point?
Well most people buy in gradually over time as they earn and save, so this really isn't an issue. If you were in the unique situation of encountering a large lump sum, then not saving any more money going forward, I guess you could DCA in over time (though you lower expected return, as well as risk, doing it this way). No need for a complex VA strategy though. Keep it simple.

Nick
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Post by avalpert »

yobria wrote:
superlight wrote:Think about it this way, if your hold is 30 years, why is a dice-roll the best starting point? Why shouldn't VA for 5 years and hold for 25 years reduce risk of an extreme entry point?
Well most people buy in gradually over time as they earn and save, so this really isn't an issue. If you were in the unique situation of encountering a large lump sum, then not saving any more money going forward, I guess you could DCA in over time (though you lower expected return, as well as risk, doing it this way). No need for a complex VA strategy though. Keep it simple.

Nick
Except that DCA, most of the time, will return lower than investing the lump sum whereas value averaging will beat it if, and this is the big point most people seem to misunderstand, your goal is to optimize return on investment for a given outcome value.

And VA is a simple strategy - it gives you clear as day buy and sell triggers.
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Post by yobria »

avalpert wrote:Except that DCA, most of the time, will return lower than investing the lump sum whereas value averaging will beat it if, and this is the big point most people seem to misunderstand, your goal is to optimize return on investment for a given outcome value.
Hmm sounds like we're talking about a very specific case here - a guy who ran into a large sum of money, who also needed a "specific outcome value". In any case the point worth repeating is that there is no free lunch with VA or any other investment scheme - if you hold more cash, your expected risk and return decline and vice versa. If it works for you, great. I'll stick with my asset allocation plan.

Nick
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Post by avalpert »

yobria wrote:
avalpert wrote:Except that DCA, most of the time, will return lower than investing the lump sum whereas value averaging will beat it if, and this is the big point most people seem to misunderstand, your goal is to optimize return on investment for a given outcome value.
Hmm sounds like we're talking about a very specific case here - a guy who ran into a large sum of money, who also needed a "specific outcome value". In any case the point worth repeating is that there is no free lunch with VA or any other investment scheme - if you hold more cash, your expected risk and return decline and vice versa. If it works for you, great. I'll stick with my asset allocation plan.

Nick
I don't know if it is that specific - anybody saving for a downpayment on a home, college tuition, new car or even some retirement targets fits the bill.

Of course there is 'no free lunch' - a way overused phrase - but there are cheaper lunches than others. VA is one of those when compared with DCA and lump sum for a given ending value. Because of volatility some level of cash holdings can reduce volatility without lowering (and even increasing) returns and VA is a method for capturing that in an innovative way.
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Post by trefoil »

I read the book and found it pretty interesting. (It is a bit like a great 12 page paper expanded to a good 80 page book.)

My savings fluctuate a lot from month to month or year to year, so it seems hard to plot out just what my value averaging path would be.

Actually, thinking about it now: suppose I did a VA review every three or six months. I would know the starting value of investments, and how much I'd put in during that period, and so I could extrapolate a desired value. I should then put in enough more cash to get up to that point, assuming I actually have that much cash free. This is not precisely correct but close.

If it's too high, within taxable savings I would not want to actually sell units and pay tax, but could look at throttling back contributions.

I don't know what the OP was thinking but I don't see VA as something that is particularly motivated by bear markets, since it tells you to buy more. At most, people might bring it up saying "I wish I'd been value averaging and sold/stopped buying last year". The time to bring it up is after a year of strong performance.

A Random Walk speaks favorably of it as I recall.
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Post by trefoil »

I think discussion of lump-sum vs trickle-in is a bit beside the point. Both DCA and VA are primarily concerned with the common case of someone gradually building up an investment using wage or salary income. If you have a lump sum first you need to decide whether or not to invest it in one swoop, and only then consider just how you will trickle it in.
I think VA presents a philosophical question: How does the savvy investor respond to a novel, complex investment scheme (or product) like this which he doesn't fully understand, and which few have used successfully? My answer: fuggetaboutit. Keep it simple and stick to the tried and true basics.
I agree you should not invest in things you don't understand, but it is also possible to expand your understanding, or at least interesting to talk about hypothetical alternatives.

In the past, simple has meant buying a few arbitrary blue chip shares, or buying equal value of each S&P 500 company, or buying an equal number of shares of each company. A market-cap-weighted was probably counterintuitive and novel in the 60s/70s, and still is to many people, but on this board it is common sense. So in principle I can believe that DCA is not the be-all and end-all of investing, even though it's what I'm actually doing now.

I like that you can implement VA to the degree that is appropriate or comfortable. For example I could DCA as usual and just use VA to decide whether or not to invest an extra $x at the end of every quarter. The potential loss is limited to the difference between keeping that money in shares or in cash. That is not negligible but a different class of risk to investment schemes that may wipe you out altogether, or leave you holding something worthless.
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Post by czeckers »

I've been using VA in one of my tax-deferred accounts. The technique is actually quite simple to execute once you set up the value path. The problem is getting the expected growth right. With all the back-tests, they plug in the optimal value path by knowing the average portfolio growth in retrospect and then using that to compare to DCA. However, going forward that's impossible to do. If you set your expected growth too aggressively you will end up being fully vested in the market all the time thereby missing out on the VA strategy. If you are too conservative you will end up sitting on a pile of cash with the resultant portfolio drag.

I know there is a table to help you using portfolio beta and 10-yr treasury bond rates, but you have to extrapolate the table to get to today's 10yr yields, and honestly I'm not sure how to go about calculating the beta for a multi-asset class diversified portfolio.

Having said that, my VA portfolio has behaved well during the last year with me being about 15% cash in October, and becoming 100% invested just this past month. Time will tell, but I'm definitely hedging my bet with this strategy by using it with the smaller of my two tax-deferred portfolios.
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Post by jeffyscott »

A value averaging based system can certainly be used when making periodic investments. What I do is just vary the percentages in our purchases, with the aim being to hit a target in X months. During one period maybe I'm putting 60% of new money into stock and during another 40%.

This is basically the same thing that one would do in rebalancing by adjusting purchases, value averaging just defines the target a little differently. For example, instead of the target being 50% stock it is $250,000 in stock on Dec 31, 2008.
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Post by avalpert »

trefoil wrote:I think discussion of lump-sum vs trickle-in is a bit beside the point. Both DCA and VA are primarily concerned with the common case of someone gradually building up an investment using wage or salary income. If you have a lump sum first you need to decide whether or not to invest it in one swoop, and only then consider just how you will trickle it in.
That's commonly said but not true at all - DCA and VA are specifically designed for deciding how to handle a lump of money. Periodic investing becuase that is when you have the cash flow (or what tax law forces yout o do) is not DCA it's periodic investing. Or, as the first line in the wikipedia article on it puts it:
Dollar cost averaging — also known as a constant dollar plan or in the United Kingdom as pound-cost averaging — is an investing technique intended to reduce exposure to risk associated with making a single large purchase.
[/b]
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Post by rgarling »

avalpert wrote: That's commonly said but not true at all - DCA and VA are specifically designed for deciding how to handle a lump of money.
Long before that wiki entry was written, DCA was defined as a fixed $ investement in a security on a fixed (periodic) schedule. (and nothing more. The many ways $ cost averaging can be used: dealing with a lump sum, dealing with a fixed pay schedule, etc was not part of the definition.

In my opinion, any definition that makes a word more context sensitive confuses the matter; also, dictionaries are better than wiki for definitions.
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Post by trefoil »

avalpert, I have the Value Averaging book in front of me and the only discussion of a lump sum investment is pp57-60, using it as the simplest case for introducing the computation of compounded returns.
... this book has focused on accumulation strategies involving a series of investments...
There are many simulated comparisons of VA to DCA under different conditions but no comparison of VA to a lump sum investment.
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Post by avalpert »

trefoil wrote:avalpert, I have the Value Averaging book in front of me and the only discussion of a lump sum investment is pp57-60, using it as the simplest case for introducing the computation of compounded returns.
... this book has focused on accumulation strategies involving a series of investments...
There are many simulated comparisons of VA to DCA under different conditions but no comparison of VA to a lump sum investment.
Check out the Spring 2000 Journal of Finance and Strategic Decisions for an article by Paul Marshall that compares VA to DCA and random investing. It all presupposes that you have the money to invest and are not dependent on cash flows - VA doesn't work if you risk of having the cash on hand is significant. "Series of investments" is not the same as "series of income to invest"
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Post by trefoil »

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Post by subrosa »

Hello avalpert
Check out the Spring 2000 Journal of Finance and Strategic Decisions for an article by Paul Marshall that compares VA to DCA and random investing. It all presupposes that you have the money to invest and are not dependent on cash flows - VA doesn't work if you risk of having the cash on hand is significant.
You have stated this with authority in two different posts but I do not think it is true so allow me to respectfully offer my thoughts as to why.

I don't have VA in front of me but iirc Edleson spends most of the last or second to last chapter with an example of a guy saving up for a vacation home.

No (lump sum) money to invest at all, dependent entirely upon new cash flows (investing from income).

Again correct me if I am wrong but the example includes the crash of 87 when coming up with enough free cash to maintain the value path would have been "unrealistic"- this too is discussed and a simple solution, with examples, is given which in this one example seemingly worked (akin to this: when using VA without a lump sum, and dependent upon cash flows, cap the max cash flow at twice the expected cash flow- at least I think this was the idea).

Since Edleson 'wrote the book', he trumps Marshall.

Marshall was mostly interested in comparing VA versus DCA. And in fact he actually did include situations in which the cash flow unexpectedly increases or decreases in the papaer referenced, specifically saying that this reflects people who might earn more with time (seemingly referring to investing from income as opposed to employing some pre-saved sum of money), and in general the Marshall paper was high praise for the superiority of VA over DCA as tested.

Marshall:
For some investors, and over a long-term investment time horizon, increasing investment funds may be available.
Those progressing successfully in their careers will fit best into this category. On the other hand, some investors
may need to invest less each period. Considering both possibilities, two different cases were studied where the dollar
amount invested either increases or decreases by 2% per quarter.
(Again, that does not sound at all like Marshall is declaring VA works only when independent from cash flows.)
@-->-->-- | | Please note: this and all posts by me are for entertainment value only & not as medical / legal / tax / financial or other investment advice. Consult your professional in all matters.
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Post by subrosa »

Hello czeckers
Having said that, my VA portfolio has behaved well during the last year with me being about 15% cash in October, and becoming 100% invested just this past month. Time will tell, but I'm definitely hedging my bet with this strategy by using it with the smaller of my two tax-deferred portfolios.
I would have to say my experience mirrors yours.

I started in September or so and spent most of last year taking cash off the table; just this month looks like I will become fully invested.

Without doubt I own more shares that I would have with straight DCA type approach, although time will tell.

Common sense tells me VA tends to be superior to (or just regresses to and approximates) DCA in sideways or subpar (beneath expected growth-expense rates); while DCA potentially is superior when market performance is well above expectations.

Given that the market performing well above my expectations hardly is a risk to my retirement, I've seen little substance to dissuade me from VA (and with the provided excel sheets, its remarkable how easy it is). I would agree thought, that in general the real benefit from VA is watered down if you hold a well diversified portfolio with 6 asset classes and regular rebalancing...

Actually, my only reservation is that gummy doesn't seem to like it much...
@-->-->-- | | Please note: this and all posts by me are for entertainment value only & not as medical / legal / tax / financial or other investment advice. Consult your professional in all matters.
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sopogah
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Location: Los Angeles, CA

Post by sopogah »

Very interesting points of views so far.

I started Value Averaging on quarterly basis in my retirement account. Allocated 20% of the portfolio as cash for purchases as needed. I am planning to be 100% invested if the market drops further in the next 2-3 quarters (who knows?). After that I will use my monthly contributions for needed purchases.

For my taxable account I DCA into Vanguard tax managed funds and forget it.

This way I get the best of both worlds, and I do need to worry as which approach is better.
_________________________________ | | "Money is a good servant, but a bad master" | | "The fewer our wants, the nearer we resemble the Gods". Socrates
hungrywave
Posts: 231
Joined: Tue Apr 09, 2019 7:48 pm

Re: Value Averaging. Any practicionors?

Post by hungrywave »

To revive the post, are their any practitioners still going? Has it been tough without crashes to justify VA so far?
The world is largely random so don't sweat the small stuff.
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firebirdparts
Posts: 1882
Joined: Thu Jun 13, 2019 4:21 pm

Re: Value Averaging. Any practicionors?

Post by firebirdparts »

I'm glad you revived these threads. Bill Bernstein's old posts helped me make sense of it.

It seems only to apply here during the accumulation phase.

In the preview to "living off your money" there were a couple strategies that are related to the same concepts as VA, but not exactly. That is, targeting a stock portfolio size as you go along, presuming that stocks are "risky" and bonds aren't. These are the Parker, Weiss, OmegaNot, and Prime.

A couple of these have a hotness dead band such that you would only sell stocks when they are X% above nominal. To me that seems useful. If you look at these old threads you see the complaint that you sell too soon.
A fool and your money are soon partners
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