Posted in Finance, Accounting and Economics Terms, Total Reads: 88
Definition: Value Averaging
Value Averaging is a technique of investing which allows the investors to invest more when prices are low and invest less when prices are high. In this method a fixed amount is set by the investor annually but monthly the investor can invest any amount according to the prices of the portfolio or the asset that are prevailing. If the investment is in the stocks so investment is according to the prices that are currently going on in the market or if the investment in the assets it according to the gain or the loss from the past month. In assets also it involves buying more when asset is cheap and buying less or even selling when asset price is less. Thus it spreads the investment risk over time.
Value Averaging is different from Dollar Cost Averaging because in dollar cost Averaging a certain amount fixed is invest every month irrespective of the increase or decrease of the asset price. So for example an individual decides to invest $100 every month in stocks if the stock price is $25 per stock so the individual can purchase 4 stocks but when the stock price increased to $50 he won’t reduce or increase the investment and purchase keep on purchasing 2 stocks.
While when it comes to value averaging example- Mr. X plans to invest $100 every year and increase by $100 every month. So for the first month the price of the share is $10 so he can buy 10 shares but next month the investment increases to $200 and the prices increase to $15. The original shares become 10*15= $150 so now individual have to just invest $50 more. But if the prices would have fallen to $5 then the value of previous shares would have been 5*10= $50 then Mr. X have to invest 150 more.