by Michael E. Edleson
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Product Description
Michael Edleson first introduced his concept of value averaging to the world in an article written in 1988. He then wrote a book entitled Value Averaging in 1993, which has been nearly impossible to find—until now. With the reintroduction of Value Averaging, you now have access to a strategy that can help you accumulate wealth, increase your investment returns, and achieve your financial goals.
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Average Customer Review:
2 of 3 people found the following review helpful:
 Good Content - Likely Hard to Pull Off, 2008-03-05
While I believe the concepts in this book would work to enhance returns, (certainly the data shown in the book indicates that it does work), I think it would be hard to actually pull this off.
With conventional dollar cost averaging, you invest a pre-set amount of money (say $100 a month) on a regular basis, an agreement you set up with a mutual fund company in advance. With the Value Averaging approach, you are supposed to invest an amount that will get you a specific amount of money each month, say $100 the first month, $200 the second, $300 the third, and so on. If the market has gone up, you would need to invest less (or perhaps nothing at all, or even have to sell), if the market is down, you would need to invest more. This would likely amount to odd amounts of money invested each month. Certainly, it would help to have an accompanying cash account to pull fund from that is held through the same provided as the fund(s) being invested in, which the author recommends. In prolonged bear market, increasing amounts of money would need to be invested, perhaps eventually more than the investor could afford. In addition, you are supposed to gradually increase your monthly investment as your portfolio grows so the new money coming in continues to be meaningful. The author explains how to do this.
It certainly would take some effort to determine what to do each month, which is vast contrast to the simplicity of traditional dollar cost averaging, which is automatic. In other words, a very good concept, but it would be difficult to make it work in the real world. If you are willing to accept the extra effort involved, and could find a mutual fund company willing to accept odd amounts of money, this book could enhance your investing returns.
2 of 2 people found the following review helpful:
 A fantastic book that describes a systematic scheme to continuously invest new money., 2007-12-26
Simply put, this book talks about how to continuously (and
systematically) keep investing money to reach your end goal.
After reading this book I've become a huge fan of value averaging over
DCA, primarily because of the following deficiencies with DCA:
* DCA never tells you went to sell (aka: rebalance your
portfolio). For that you need to make a market timing decision
or pick a random date to do it (suboptimal). If there was a
mechanical way of saying, its time to sell, which was optimal,
that would be good.
* If you invest $100/month in asset A; the $100 you invest in
(month 1, year 1) != the $100 you invest in (month 12, year 10),
because of inflation and the fact that over the long run the
asset A has a non-zero expected return (which is the reason you
are investing in it in the first place!)
* During severe market corrections. Think 1987 -23% style
corrections, DCA will let you buy more shares for the fixed
amount but makes no mechanical suggestion to actually buy a lot
more shares
So essentially, VA is the following:
VA is basically a formula based investing strategy like DCA but it
tells you when to sell (Think rebalancing). Here you make the value of
the fund that you own go up every month and not the actual market
price. Lets take a simplistic form of VA: Say you contribute $100
(=contribution amount C) every month to fund X. In month 1 the NAV was
$1 and you bought 100 shares. In month 2 you want the value of your
fund to go to $200, but it turns out the market price of what you own
is now $127, then you contribute only $73 in month 2. In month 3 the
fund tanks and value has gone to $150, then you need to put in $150 to
keep your value in line to $300. If in month 4 the fund goes crazy and
becomes $700 and your target was to get it to $400 you sell $300. No
other mechanical strategy tells you when to sell.
I strongly recommend fellow DCA-ers to pick up this book!
0 of 0 people found the following review helpful:
Surprisingly Relevant for Accumulators, 2007-11-27
I have been utilizing the value averaging approach for about 3 years now, and am impressed with the ideas behind it. Before buying the book, I was very curious about how relevant it would be for a young accumulator like myself. I had the impression that it was a strategy geared towards people that had a lump sum to invest. I also wondered whether it was relevant for those who have already developed a well-diversified portfolio.
I found that this book is extremely useful for those that are accumulating as it helps you develop a value path that includes periodic investing. It also makes adjustments for expected growth of contributions (as your wages hopefully increase throughout your career).
As far as the second question I had: I initially believed that this value averaging approach needed to be performed on specific funds in isolation. For instance, I thought that I would need to set up separate paths for each of my funds. However, I found that the value averaging approach can be used towards the entire portfolio as a whole. The first step is to develop a portfolio with a suitable asset allocation. Then you feed money into the portfolio according to the value path. This effectively creates two layers of risk-management:
- First, you manage your risks by making sure the portfolio itself is well balanced between asset classes.
- Second, you manage your risks by adjusting the amount of money you feed into the portfolio based upon its value path.
It is important to understand the reasonings behind value averaging. For me, the use of value averaging has two important objectives:
- The first objective is a behavioral one. It allows risk averse investors like myself to find a systematic way to put money into the volatile financial markets. Because behavioral issues have a major impact on returns, I believe that this is a very important objective.
- The second objective is to dynamically adjust your asset allocation to better reflect an investor's NEED to take risk. The maximum risk you should take should be defined by your risk tolerance, and this is determined by your asset allocation (i.e. when you are feeding money into your portfolio, the money still needs to be going into the right funds to maintain balance in your desired asset allocation). However, when you are exceeding your goals, by going beyond your value path, the value averaging technique actually forces you to put more money into riskless securities (the "side" fund, which is usually a money market fund). This has the effect of temporarily reducing your equity allocation. This coincides with the idea that when you are exceeding your goals, you can afford to take less risk. I find this to be superior to the static asset allocation technique, as I do not believe in taking unnecessary risks if you are on a path to reach your goal.
I am very impressed with Edleson's ideas in this book. I think it will be very useful for any investor that has experienced anxiety putting money into the market. I give it an enthusiastic 5 stars.
9 of 35 people found the following review helpful:
 Value Averaging, 2007-02-11
I'm sorry, but I put this book down after reading the first three chapters. This book takes into account strategies that only work if the individual stock or market continuously goes up. If a stock hits a new high or low, taking this books advice, you should buy ignoring all other market conditions. This will hedge your profit or loss while investing blindly into the market. No wonder why the majority of individual investors will end up losing in the stock market.
With the housing boom coming to an end, interest rates artificially being kept low, and inflation on the horizon, the book will lower your net worth for years to come.
For a man with an MIT PHD and the Managing Director of Morgan Stanley, this book is a big disappointment.
5 of 11 people found the following review helpful:
For your investing library, 2007-02-08
I had not heard of this technique until the book was featured on my Amazon page. I immediately purchased the book based on William Bernstein's review of the book in the foreword.
Value Averaging is a type of Dollar Cost Averaging recommended by many writers but is an improvement in that it also is a rule based dicipline for selling off portions of your portfolio on the way to your final objective. It is a buy low/sell high set of rules. The formula will be a little complex to those who abhor math, but just stick with the system to achieve superior returns.
I also recommend a little book titled How to Make Money in the Stock Market-Buy 2,500 different stocks for $1000 - Pay no Commission This book is a must for those wanting to find out about indexing (passive investing) and why it is the superior method for the small investor (and big one too). This book is an outstanding guide to personal investing. It will be useful to all investors from novices to highly the highly experienced. This book prepares the reader to approach investing from the standpoint of the underlying science. It is the antithesis of a 'get rich quick scheme'.
All aspects of Modern Portfolio Theory and passive (index) investing are explained in a through and easily understood manner. The aspect I like most is that as well as a solid theoretical foundation the book is very practical and shows the reader how to create (and more importantly) and manage over time a successful portfolio. This is a great book- for the beginning investor, it's a great place to start and for the experienced investor there are many valuable suggestions. I wrote this little book so I believe that it contains all you need to know about investing.
How to Make Money in the Stock Market-Buy 2,500 Different Stocks-Pay no Commission
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