Value Averaging

I introduced the concept of value averaging in my how to invest post at the beginning of July, and we started investing a few days later.  Today is our monthly investment day, and I want to delve into value averaging a bit more with you, now that I have some actual experience with it.

So, first, let’s take a look at what our actual investments have looked like over the past five months:

 MONTH CURRENT TARGET VALUE INVESTMENT
July $0.00 $3,000.00 $3,000.00
August $3,122.04 $6,017.50 $2,895.46
September $6,065.26 $9,052.60 $2,987.34
October $8,895.42 $12,105.41 $3,209.99
November $11,690.20 $15,176.02 $3,485.82
December $16,024.37 $18,264.55 $2,240.18

These numbers target a $3,000 pcm investment with a 7% pa return (spread out over 12 months, so ~0.57% pcm).  You can see that the actual investment we put in has varied fairly significantly, and that’s just with the small numbers we have right now.  However, the target investment out of pocket so far has been $17,818.79, which is less than the $18,000 that we were targeting to invest.

For comparison, let’s take a look at what the numbers would be if we had just done standard dollar-cost averaging.  Since we’re 100% in VTSAX (originally VTSMX), we can easily calculate the monthly gain/loss percentages:

MONTH PREVIOUS CURRENT CHANGE
August $3,000.00 $3,122.04 4.068%
September $6,017.50 $6,065.26 0.794%
October $9,052.60 $8,895.42 -1.736%
November $12,105.41 $11,690.20 -3.430%
December $15,176.02 $16,024.37 5.590%

Applying these percentages to the what-if scenario, we get these numbers:

MONTH CURRENT INVESTMENT FINAL
July $0.00 $3,000.00 $3,000.00
August $3,122.04 $3,000.00 $6,122.04
September $6,608.13 $3,000.00 $9,608.13
October $9,441.33 $3,000.00 $12,441.33
November $12,014.60 $3,000.00 $15,014.60
December $15,853.91 $3,000.00 $18,853.91

Let’s take a look at the progress side to side:

MONTH CHANGE VA VALUE DCA VALUE VA INVEST DCA INVEST
July $3,000.00 $3,000.00 $3,000.00 $3,000.00
August 4.068% $6,017.50 $6,122.04 $5,895.46 $6,000.00
September 0.794% $9,052.60 $9,608.13 $8,882.80 $9,000.00
October -1.736% $12,105.41 $12,441.33 $12,092.79 $12,000.00
November -3.430% $15,176.02 $15,014.60 $15,578.61 $15,000.00
December 5.590% $18,264.55 $18,853.91 $17,818.79 $18,000.00

So, what do we see so far?

  1. DCA has almost $200 more invested but has almost $600 in additional value.
  2. VA is investing less when prices go up and more when prices go down, as promised.

This is obviously not enough data to draw real conclusions, but it doesn’t seem super promising on its own.  I’m wondering if VA really shines in comparison to DCA when heading through a recession.  I think I will look for VTSAX values in the 2007 to 2010 period and create a similar comparison.

Stay tuned.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s