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- Guiding Principles for Value Averaging<\/a><\/li>\n\n\n\n
- Understanding the Concept<\/a><\/li>\n\n\n\n
- When the Price moves Downwards<\/a><\/li>\n\n\n\n
- When the Price moves Upwards<\/a><\/li>\n\n\n\n
- When the Price moves Down, then Upwards<\/a><\/li>\n\n\n\n
- When the Price moves Up, then Downwards<\/a><\/li>\n\n\n\n
- What is Value Averaging good for?<\/a><\/li>\n\n\n\n
- Real Life Application<\/a><\/li>\n<\/ol>\n\n\n\n
One Minute Summary<\/h2>\n\n\n\n
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- Overall, value averaging attempts to replicate the investment idea of “buy low, sell high”.<\/li>\n\n\n\n
- Similar to dollar cost averaging<\/a>, value averaging is not a foolproof investment strategy.<\/li>\n\n\n\n
- Hence before you invest your hard-earned money, be sure to revisit the basics, e.g. investing into the right assets.<\/li>\n<\/ul>\n\n\n\n
Part 1: Guiding Principles for Value Averaging<\/h2>\n\n\n\n
Altogether, there are three guiding principles in value averaging:<\/p>\n\n\n\n
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- There is a defined period<\/strong> on which the investment is made, e.g. 10 periods;<\/li>\n\n\n\n
- There is a defined growth rate<\/strong> that we want our portfolio to achieve, e.g. 5% per annum;<\/li>\n\n\n\n
- We will make the necessary portfolio adjustments<\/strong> on every defined period, i.e. buy or sell the investment units.<\/li>\n<\/ol>\n\n\n\n
For that reason, we will invest or withdraw our capital based on the portfolio’s performance at each time period. This is on account of maintaining the same level of expectation throughout the entire investment horizon.<\/p>\n\n\n\n
Part 2: Understanding the Concept<\/h2>\n\n\n\n
Part 2.1: Basic Assumptions<\/h3>\n\n\n\n
Firstly, let\u2019s understand how value averaging works as an investment strategy. As an illustration, we will use the following assumptions:<\/p>\n\n\n\n
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- Number of Periods: 3 years<\/li>\n\n\n\n
- Target Growth Rate: 5% per annum<\/li>\n\n\n\n
- All figures are rounded off to the nearest 2 decimal places.<\/li>\n<\/ol>\n\n\n\n
To begin with our investment journey, let\u2019s invest a lump sum of $10,000 into a portfolio. Seeing that budget and the current market price at $10 per investment unit, we will own 1,000 investment units today.<\/p>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_concept1.webp\")
Value Averaging: Understanding the Concept<\/figcaption><\/figure>\n\n\n\n Part 2.2: When the Portfolio Value is lower than the Target Growth Rate<\/h3>\n\n\n\n
During the second year, we expected our portfolio value to rise to $10,500. In truth, it is worth $10,200 only. In this situation, we need to invest another $10,500 – $10,200 = $300. To put it another way, we will purchase another 29.41 investment units.<\/p>\n\n\n\n
In effect, this restores our portfolio value to its target value at $10,500.<\/p>\n\n\n\n
Part 2.3: When the Portfolio Value is higher than the Target Growth Rate<\/h3>\n\n\n\n
In the third year, we expected our portfolio value to be $11,025. By comparison, its actual value is $1,029.41 x $11 = $11,323.53. In this case, the portfolio’s growth exceeded our expectation.<\/p>\n\n\n\n
As a result, we will sell 27.14 investment units. Thereupon, we bring our portfolio back to its target point at $11,025.<\/p>\n\n\n\n
In summary, we will buy or sell investment units after comparing the portfolio value against its expectation.<\/p>\n\n\n\n
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- When Portfolio Value is lower than Expected Value: Invest the difference.<\/li>\n\n\n\n
- When Portfolio Value is higher than Expected Value: Withdraw the difference.<\/li>\n<\/ul>\n\n\n\n
Now that you have a grasp on value averaging, let’s go through four examples together.<\/p>\n\n\n\n
Part 3: When the Price move Downwards<\/h2>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_down1.webp\")
Value Averaging: When the Price moves Downwards<\/figcaption><\/figure>\n\n\n\n To illustrate, let’s start with an initial capital of $10,000. On this occasion, we can purchase $10,000 \/ $10 = 1,000 investment units.<\/p>\n\n\n\n
Part 3.1: At Year 2, Price per Investment Unit = $9<\/h3>\n\n\n\n
In this case, our portfolio value fell short of expectation ($9,000 vs $10,500). Consequently, we need to purchase another 166.67 investment units and invest $1,500 into the portfolio.<\/p>\n\n\n\n
In essence, we repeat this process so long as the portfolio value is lower than its expected value.<\/p>\n\n\n\n
Part 3.2: Five Years later…<\/h3>\n\n\n\n
Eventually, we invested a total capital of $17,353.60 with 2,025.84 investment units. At the present time, these investment units are worth 2,025.84 x $6 = $12,155.06. In other words, we lost $17,353.60 – $12,155.06 = $5,198.54.<\/p>\n\n\n\n
Part 3.3: Long-Term Outlook<\/h3>\n\n\n\n
In the long run, value averaging requires us to purchase more investment units when the portfolio underperforms. However, this strategy ignores the portfolio’s fundamentals and market movement. Under those circumstances, we may be empty our life savings into a bottomless pit. Hence, value averaging does not work on this occasion.<\/p>\n\n\n\n
Part 4: When the Price moves Upwards<\/h2>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_up1.webp\")
Value Averaging: When the Price moves Upwards<\/figcaption><\/figure>\n\n\n\n Comparatively, let’s look at an example when the portfolio portrays an upward trend. In the same way, we invest a capital of $10,000. In this case, we will purchase $10,000 \/ $6 = 1,666.67 investment units.<\/p>\n\n\n\n
Part 4.1: At Year 2, Price per Investment Unit = $7<\/h3>\n\n\n\n
In this situation, our portfolio value exceeded our expectation ($11,666.67 vs $10,500). As a result, we will sell 166.67 investment units. This is because we have earned a higher profit than expected.<\/p>\n\n\n\n
Summing up, we repeat this process so long as the portfolio value is higher than its expected value.<\/p>\n\n\n\n
Part 4.2: Five Years later…<\/h3>\n\n\n\n
By and large, we ended the fifth year with 1,215.51 investment units. At this point, these investment units are worth 1,215.51 x $10 = $12,155.06. On the other hand, the (remaining) invested capital is $10,000 – $1,166.67 – $975 – $826.88 – $707.44 = $6,324.02.<\/p>\n\n\n\n
Furthermore, that earlier sales of 451.16 investments gave us an additional profit of $3,675.98.<\/p>\n\n\n\n
To sum up, our total profit is $3,675.98 + ($12,155.06 – $6,324.02) = $9,507.02.<\/p>\n\n\n\n
Part 4.3: Long-Term Outlook<\/h3>\n\n\n\n
In the long run, value averaging allows us to do a partial withdrawal when the portfolio over performs. We are certain to reach our financial goals to that end!<\/p>\n\n\n\n
Part 5: When the Price moves Down, then Upwards<\/h2>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_downup1.webp\")
Value Averaging: When the Price moves Down, then Upwards<\/figcaption><\/figure>\n\n\n\n After two simple rounds of investing, let’s combine the scenarios from Part 3 and Part 4 together. Correspondingly, we will use the same capital of $10,000. On this occasion, we can purchase $10,000 \/ $10 = 1,000 investment units.<\/p>\n\n\n\n
Thereafter, we repeat the process from Part 3 or Part 4. In detail, each step depends on the portfolio’s performance against its expectation.<\/p>\n\n\n\n
Part 5.1: Five Years later…<\/h2>\n\n\n\n
In time to come, we have 1,215.51 investment units on the fifth year. At this time, the remaining investment units are worth 1,215.51 x $10 = $12,155.06.<\/p>\n\n\n\n
Additionally, our earlier sales of 622 investment units gave us $5,439 in profit.<\/p>\n\n\n\n
Summing up, our total profit is $5,439 + ($12,155.06 – $10,211) = $7,383.06.<\/p>\n\n\n\n
Part 5.2: Long-Term Outlook<\/h3>\n\n\n\n
Despite the initial downtrend, value averaging allows us to reap a higher return in due time. This is owing to the additional investment units that we purchased earlier. Therefore, value averaging works to this end.<\/p>\n\n\n\n
Part 6: When the Price moves Up, then Downwards<\/h2>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_updown1.webp\")
Value Averaging: When the Price moves Up, then Downwards<\/figcaption><\/figure>\n\n\n\n In contrast, let’s invert the scenario in Part 5. In like fashion, we will start with the same capital of $10,000. Accordingly, we will purchase $10,000 \/ $6 = 1,666.67 investment units.<\/p>\n\n\n\n
Thereafter, we repeat the process from Part 3 or Part 4. In detail, each step depends on the portfolio’s performance against its expectation.<\/p>\n\n\n\n
Part 6.1: Five Years later…<\/h3>\n\n\n\n
At length, we have 2,025.84 investment units on the fifth year. Presently, the remaining investment units are worth 2,025.84 x $6 = $12,155.06.<\/p>\n\n\n\n
Moreover, our earlier sales of 564.17 investment units gave us an additional profit of $4,933.33.<\/p>\n\n\n\n
In sum, our total profit is $4,933.33 + ($12,155.06 – $11,295.79) = $5,792.58.<\/p>\n\n\n\n
Part 6.2: Long-Term Outlook<\/h3>\n\n\n\n
Given that same position, value averaging generated a decent amount of profit for us. This is on account of the investment units that we sold earlier. Hence, value averaging works in this situation.<\/p>\n\n\n\n
Part 7: What is Value Averaging good for?<\/h2>\n\n\n\n
In the final analysis, value averaging attempts to replicate the idea of “buy low, sell high”. Like dollar cost averaging<\/a>, value averaging is certainly not a foolproof investment strategy. Instead, you may consider value averaging when you have <\/p>\n\n\n\n
- There is a defined growth rate<\/strong> that we want our portfolio to achieve, e.g. 5% per annum;<\/li>\n\n\n\n
- Hence before you invest your hard-earned money, be sure to revisit the basics, e.g. investing into the right assets.<\/li>\n<\/ul>\n\n\n\n
- Understanding the Concept<\/a><\/li>\n\n\n\n
![\"Value](\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_va_reallifeapp1.webp\")