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Dollar value averaging vs. dollar cost averaging

Can you explain the difference between dollar cost averaging and value averaging. Some experts recommend these share buying techniques when a market is falling. Is this right?

Dollar value averaging (DVA) involves adding to your portfolio of shares so that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, when the market falls, you contribute more but when it rises, you contributes less. In contrast to dollar cost averaging, which is based on a fixed amount of money being invested at each period, with DVA you can even not invest in some markets.

Many experts support DVA over dollar cost averaging because when a market falls and shares become more attractive at lower prices you actually buy a lot more shares. On the other hand, when share prices rise and are relatively less attractive you buy less. This method is a little more complicated that dollar cost averaging as you have to do the maths. Many investors like dollar cost averaging because it is more automatic pilot and you can pre-arrange for say $1000 a month to go into buying shares.

What I like about this method is that instead of investing a sum of money all at once, you allocate it over time. So, for example, if at the beginning of the year you had $60,000 you wanted to invest in stocks, you might invest $10,000 every two months over a year instead of plonking it into the market in one go. It means if the market falls by 10 per cent you don’t see $6000 disappear in one go.

With DVA you work out your money goal and then you do a bit of work to make it happen. The goal might be based on a 10 per cent return a year and then you have to invest each month to achieve that goal.

In a nutshell, you might nominate a goal of $500K in 20 years time and using a return of say 10 per cent a year you have to increase your investment in bad years when you miss 10 per cent but you can ease up in good years.

Both a good ideas of imposing a discipline into building a portfolio, but most money experts who understand both methods seem to think that DVA is a better method.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

 

Published on: Tuesday, February 16, 2010

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