Strategie
Value Averaging: A Smarter Way to Invest Regularly?
Key takeaways
- Value averaging does not set a fixed investment amount but a fixed target growth for the portfolio's value.
- When the market falls you invest more, when it rises you invest less or nothing — systematically buying low.
- Historical data suggest a slight advantage over DCA, but the difference is small.
- The strategy requires a liquidity reserve for months when significantly more investment is needed.
- For the vast majority of investors, straightforward DCA or lump sum is simpler.
Value averaging is a strategy in which you do not decide how much to invest but how fast the portfolio's value should grow — and you adjust the amount each month based on what the market did.
How it works in concrete terms
You set a target: the portfolio should grow by 2,000 CZK every month. If in January the market fell and the portfolio dropped by 500 CZK, you invest 2,500 CZK (to bring it back to the target value plus 2,000 CZK). If the market rose by 2,500 CZK, you invest only 500 CZK — or nothing at all. In the extreme case of a strong rally you may even sell part of the position.
Compared with classic DCA, which always invests the same amount, value averaging automatically buys more during declines — thereby lowering the average purchase price even more dramatically.
Results in numbers
Academic studies (Michael Edleson, 1988) showed that value averaging has historically outperformed DCA by fractions to single-digit percentage points annually. The difference is real but not dramatic. It also depends on the period and market.
Practical limitations
- You need to maintain a cash reserve for months of large declines
- Need to calculate the target value every month — cannot be fully automated
- Sales during strong rallies may generate taxable income
- Psychologically demanding: during downturns you invest a lot even when everything seems threatening
Who value averaging suits
Investors with a sufficient reserve, an analytical approach, and a willingness to perform the calculation each month. If you are looking for simplicity, choose a standing order for ETFs — and combine it with buying more during downturns, where the logic is clear without complex mathematics.
FAQ
How does value averaging differ from DCA?
DCA always invests a fixed amount. Value averaging sets a target growth for the portfolio's value and adjusts the investment amount each month — investing more during declines and less or nothing during rallies.
Is value averaging better than DCA?
Slightly yes, according to historical data. The difference is typically fractions to single-digit percentage points annually. But it requires a cash reserve and monthly calculations — impractical for many investors.
What is the biggest risk of value averaging?
Insufficient cash during a significant downturn. If you do not have a reserve, you cannot follow the strategy. An unfollowed strategy is worse than a simpler approach that actually works over the long term.
Do I have to sell with value averaging?
Technically yes — during a strong market rally the target value may require selling part of the position. That generates a taxable event. Therefore many investors use a modified version where they only limit purchases but do not sell.