If you haven’t read my DCA post, check it out here: DCA Dollar Cost Averaging - The Pros and Cons
What is Value Averaging? #
Value Averaging was developed by former Harvard professor Michael E. Edleson. Instead of investing a fixed amount each period (like DCA), you aim for your portfolio’s value to increase by a fixed amount.
- Portfolio underperforms? Invest more to reach your target.
- Portfolio overperforms? Invest less, or even sell some assets.
This forces you to be a contrarian investor—automatically buying more when prices are low and less when prices are high.
VA vs. DCA: Quick Comparison #
| Aspect | DCA Approach |
|---|---|
| Investment | Fixed amount (e.g., $500/month) |
| Market Down | Buy more shares automatically |
| Market Up | Buy fewer shares automatically |
| Effort | Set it and forget it |
| Cash Flow | Predictable |
| Aspect | VA Approach |
|---|---|
| Investment | Variable, based on performance |
| Market Down | Invest MORE to hit target |
| Market Up | Invest less or SELL |
| Effort | Requires monitoring |
| Cash Flow | Unpredictable |
Real Example: VA vs DCA Side-by-Side #
Goal: Grow portfolio by $1,000/quarter. Starting with $1,000.
| Quarter | Price | VA Investment | VA Value | DCA Investment | DCA Value |
|---|---|---|---|---|---|
| Q1 | $10.00 | $1,000 | $1,000 | $1,000 | $1,000 |
| Q2 | $12.50 | $750 | $2,000 | $1,000 | $2,250 |
| Q3 | $8.00 | $1,720 | $3,000 | $1,000 | $2,440 |
| Q4 | $11.00 | -$125 (sell) | $4,000 | $1,000 | $4,355 |
| Strategy | Total Invested | Final Value | Gain |
|---|---|---|---|
| VA | $3,345 | $4,000 | $655 (19.6%) |
| DCA | $4,000 | $4,355 | $355 (8.9%) |
VA achieved nearly double the return while investing $655 less capital.
The key insight: In Q3 when prices dropped, VA forced a larger investment. In Q4 when prices recovered, VA actually sold $125—locking in gains automatically.
Visual Comparison #
Portfolio Growth #
Investment Per Quarter #
Notice how VA invests more when prices dip (Q3) and sells when prices rise (Q4). That’s “buy low, sell high” on autopilot.
Pros and Cons #
- Automatic contrarian investing — Buy low, sell high by design
- Removes emotion — The math decides, not your feelings
- Lower average cost — Tends to outperform DCA over time
- Goal-oriented — Great for specific targets (down payment, etc.)
- Complexity — Requires regular calculations
- Cash drag — May hold cash during bull markets
- Large investments needed — Market crashes require big buys
- Tax events — Selling triggers capital gains
Is VA Right for You? #
- A disciplined, hands-on investor
- Someone with irregular income who can deploy lump sums
- Approaching a specific financial goal
- A beginner who wants simplicity
- On a fixed monthly budget
- Uncomfortable holding cash during bull runs
Getting Started: 5 Steps #
- Define your value path — How much should your portfolio grow each period?
- Choose your investment — Low-cost index fund or ETF
- Make your first investment — Get on the path
- Schedule check-ins — Monthly or quarterly reviews
- Maintain a cash reserve — You’ll need it for market dips
Bottom Line #
Value Averaging is a powerful strategy that mathematically enforces “buy low, sell high.” It can outperform DCA, but requires more effort and a cash buffer.
If you’re ready to take a more active role in your investments and embrace a contrarian approach, Value Averaging might be exactly what you’re looking for.