Dollar Value averaging (DVA)1, is a technique of adding to an investment portfolio with the objective of providing a greater return than similar methods such as dollar cost averaging and random investment. With the DVA method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more, while in periods of market climbs, the investor contributes less. In contrast to dollar cost averaging which mandates that a fixed amount of money be invested at each period, the value averaging investor may opt to withdraw from the portfolio in some periods where growth exceeded the investor’s established growth target.
Value averaging incorporates one crucial piece of information that is missing in dollar cost averaging – the expected rate of return of your investment. The investor must provide this information for the value averaging formula. Having this data allows the value averaging formula to identify periods of investment over-performance and under-performance versus expectations. If the investment over-performs, the investor buys less or even sells to reduce gains down to the growth target. If the investment under-performed, the investor buys more to reach the growth target.
So how does this work? Let’s say you want to have a portfolio of five coins: BTC, LTC, XMR, NEO, and OMG and you initially invest $1,000 USD into each coin for a total of $5,000 initial portfolio. Let’s further say that you want your portfolio to grow by $100 each and every week. What that means is that you want every position to grow by $20 every week to meet your declared target. Next week, you want $5100 total portfolio. The following week, $5200, then $5300, etc. The first thing you have to do is compare every coin’s worth in your portfolio and invest enough to bring each one up by $20. If the market for a coin was up and your coin grew in value by $10, you only need to invest $10 to bring it to $1020. If a coin fell by $10, you have to invest $30 in the coin to bring it to $1020. If one coin grew to $1030, you can take $10 out of that coin and invest it in the one that fell by $10 and you still have $100 to distribute to the other coins to bring them all to $1020. If you only need $50 this week to bring every coin to $1020 and entire portfolio to $5100, then that’s all you invest this week. If you need $200 the following week to get to $1040 for every coin, then that’s your number to invest that week.
Thus, the difference between DCA and DVA. DCA is a set amount every week. DVA can potentially fluctuate week to week and therein is both it’s drawback and power. The drawback is you’ll sometimes need more funds than anticipated to stay on par with your growth goals and can be a stretch sometime to meet those goals. HOWEVER, it’s also the strength of the system because you’re automatically buying MORE shares in a down market and less in an UP market.
This strategy is a bit more complex to manage, as it does require that the investor track the portfolio performance and calculate the contribution needed for the next period to maintain a constant growth in the value of the portfolio. It can also require large periodic additions of capital during falling markets. The table below is a spreadsheet comparison of a Dollar Cost Averaging strategy and a Value Averaging strategy during a period of varying stock price.2