Value Averaging?
Value Averaging?
Has anyone read Value Averaging by Michael Edleson? If so, what are your thoughts on the practice and do you employ it personally? I haven't been able to bring myself to try it yet. Thanks for any input.
Hi Pangloss (nice nickname),
I'd recommend backtesting value averaging on Excel to see for yourself. I did that and found it to not be as good as it's made out to be.
The bottom line is that some years of huge gains (like the S&P 500 in the late 90s), you end up with a MASSIVE amount of money in your money market account and miss out on a lot of appreciation.
Then when the market goes down, your money market account gets wiped out pretty fast putting it back into the market, but it just keeps declining anyway.
The net result of my backtest was that value averaging had several percentage points less of a return than just putting everything into the investments.
Best regards,
John
I'd recommend backtesting value averaging on Excel to see for yourself. I did that and found it to not be as good as it's made out to be.
The bottom line is that some years of huge gains (like the S&P 500 in the late 90s), you end up with a MASSIVE amount of money in your money market account and miss out on a lot of appreciation.
Then when the market goes down, your money market account gets wiped out pretty fast putting it back into the market, but it just keeps declining anyway.
The net result of my backtest was that value averaging had several percentage points less of a return than just putting everything into the investments.
Best regards,
John
Last edited by johnb on Wed Jul 18, 2007 11:06 am, edited 1 time in total.
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Petrocelli
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Value Averaging
My thoughts:
1. The book is worth reading. It is very advanced, but well written. There are spreadsheets on the publisher's website which will help you implement the strategy.
2. Value averaging is like rebalancing on steroids. When the market is going up, you are often taking money out of equities, and putting it in cash. This will obviously cause your returns to be lower in an up market. However, at the same time, you are taking less risk.
3. I like value averaging because it forces you to focus on the amount you have for retirement rather than returns. Look at it this way: right now, I have enough money to be on track to meet my retirement goal. I also have around 23% in cash and short term bonds. I figure that if my portfolio drops by 30% or so, I will still have enough in my "side account" to stay on track. That gives you psychological comfort in a down market.
1. The book is worth reading. It is very advanced, but well written. There are spreadsheets on the publisher's website which will help you implement the strategy.
2. Value averaging is like rebalancing on steroids. When the market is going up, you are often taking money out of equities, and putting it in cash. This will obviously cause your returns to be lower in an up market. However, at the same time, you are taking less risk.
3. I like value averaging because it forces you to focus on the amount you have for retirement rather than returns. Look at it this way: right now, I have enough money to be on track to meet my retirement goal. I also have around 23% in cash and short term bonds. I figure that if my portfolio drops by 30% or so, I will still have enough in my "side account" to stay on track. That gives you psychological comfort in a down market.
Petrocelli (not the real Rico, but just a fan)
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WiseNLucky
- Posts: 634
- Joined: Tue Mar 13, 2007 5:14 am
- Location: South Florida
Re: Value Averaging
I feel the same way. When I am exceeding my goals, Value Averaging automatically forces me to reduce my risk. When I am behind on my goals, it tells me how much I need to contribute, which may guide me in adjusting my consumption during that time.Petrocelli wrote: 3. I like value averaging because it forces you to focus on the amount you have for retirement rather than returns. Look at it this way: right now, I have enough money to be on track to meet my retirement goal. I also have around 23% in cash and short term bonds. I figure that if my portfolio drops by 30% or so, I will still have enough in my "side account" to stay on track. That gives you psychological comfort in a down market.
The book focuses on the technical aspect a lot, but there is a lot to be said for the philosophy. Great book, imho.
Value averaging
The system has been followed by AAII investors since 1988. Recommend to join AAII and see their experience. The book now on sale updates the original book at the end of each chapter.