Personal Finance: what is Value Averaging and how can it make you earn?
We all know what a accumulation plan is, but perhaps not everyone has heard of a more effective variant, known as “Value Averaging“. It has been shown that Value Averaging produces better results over time compared to a traditional accumulation plan: in fact it is as close as you can get to the elusive “buy low, sell high”, without having a crystal ball.
Accumulation plan yes, but mediated by current prices
In practice, when a portfolio is underperforming, the prices of the financial instruments it contains are likely to be low. It will be then that you invest more, to compensate for the underperformance. However, when the portfolio exceeds the return of the target rate, prices are likely to be high. This means that is not a good time to buy and you may even sell for a profit, provided you maintain your predetermined average growth rate.
The method is particularly valuable during times of high volatility, to ensure that investors maintain some discipline in their investments. And in these difficult market conditions, it’s definitely worth considering.
The Value Averaging rule
The rule of Value Averaging is simple: make the value of your overall investment increase by a fixed amount every month. Value Averaging tends to yield higher returns over short-term investment periods, helping investors overcome market volatility without worrying too much about market timing.
Are you interested in the most effective management methods for your personal finances? Here are some of the best resources to better manage your money:
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