Value Averaging One-Pager

When it comes to saving for retirement, many financial "experts" will advise you to "save as much as you can." They seem to believe that it's impossible to save too much. It's as if retirement is on the other side of a high brick wall. In your working years, you are told to toss as much money over the wall as you can. Then, when you retire, you will wander over to the other side and hopefully you'll find enough money there to fund your retirement.

This not a very sophisticated plan, but this is how most people approach their retirement planning.

It's time for a smarter method of planning for the future.

Retirement planning should be a three step process:

• Envision the life you want.
• Figure out how much money it will take to make that vision a reality.
• Save just enough so that you will have the right amount of money to fulfill your dreams.

Value Averaging makes it possible to plan and save this way. It allows you to feel confident that you will fulfill your dreams.

What is Value Averaging?

Value Averaging, also called Dollar Value Averaging (DVA), is a strategy for making periodic investments. It was developed by then-Harvard professor Michael Edleson and described in detail in his book, Value Averaging - The Safe and Easy Strategy for Higher Investment Returns. It is an ideal way to save for retirement or some other goal that is significantly far into the future. It is similar to Dollar Cost Averaging (DCA), which is a system where an investor contributes a set amount to his portfolio every period. The difference between DCA and DVA is that while DCA dictates the amount that the investor contributes every period, DVA dictates what the portfolio's total value will be each period. For an example of how this works in practice see A Value Averaging Example.

Value Averaging achieves higher returns than Dollar Cost Averaging. In his book, Edleson compared the returns of DVA and DCA. He found that the rate of return for DVA was so high that a $100,000 investment that earned the DVA return would be worth about $450,000 more after 20 years than if it were invested at the DCA rate of return*. DVA beat DCA in 96 out of 100 20-year simulations.

The reason DVA gets such significantly higher returns is that it adjusts the investor's contribution amount based on how his investments are doing. If they've been going up faster than expected, DVA will instruct him to contribute less. If they've been performing poorly, it will instruct him to contribute more.

When you use Value Averaging, you end up buying more shares when prices are lower and fewer shares (and sometimes even selling shares) when prices are higher. It is a strategy that boosts your returns by forcing you to systematically buy-more-low and buy-less-high. It is not market timing. The system does not look at the momentum of the market, the economic conditions, the Federal Reserve, or any other indicator. It merely looks at the prices and determines if they are lower or higher than they were, and provides the appropriate buy and sell recommendations.

Value Averaging Prevents the Two Biggest Sins of Long-Term Investors

There are two types of investors who are doing tremendous harm to themselves:

Those obsessive types who monitor their portfolios every day.	Those head-in-the-sand types who go years without paying one bit of attention to their investments.

Value Averaging helps you avoid both of these destructive behaviors. With Value Averaging, there is no reason to monitor your portfolio's value, because its value is predictable. Each month or quarter you will set the value of the portfolio back on the Value Path, so the impulse to check on it every day should diminish significantly.

For the person who never checks on his investments (like the guy who doesn't even open his 401k statements), Value Averaging will get him to pay attention on a periodic basis. This person will become appropriately reacquainted with his investments.

Value Averaging is Focused on the Goal

Value Averaging requires you to decide up front how much money you want to save. Then, it creates a "Value Path" which shows how much your portfolio should be worth each step of the way. When you stick to the Value Path, you achieve the goal. It's very satisfying to have this kind of certainty about your investments.

Value Averaging is a more robust way to save than Dollar Cost Averaging. Now, with the introduction of ValueAverager it's easy and accessible to everyone.

* In Edleson's scenarios, DVA had an annual average return of 15.59% and DCA had 14.31%. Over a 20-year period and compounding quarterly, a $100,000 investment would be worth $2,130,138.34 and $1,664,308.98 respectively.