Value Averaging is an investment strategy, like Dollar Cost Averaging, that involves making regular contributions over time. However, when Value Averaging, the investor has a target portfolio value each month and makes irregularly sized investments relative to the price of the acquired asset. Basically, the investor purchases however much of the asset they need to make the portfolio equal a set amount.
When Value Averaging there is a target portfolio value we are trying to reach at each interval. In practice this means if the asset we are building a position in has decreased in price, we buy more and if its gone up in price, we buy less. This differs from DCA because when DCA’ing we are purchasing the same amount of the asset, regardless of price, at each interval.
Here is an example, we want this portfolio to have $4,000 worth of value at the end of four months:
|Month||Portfolio Target||Asset Price||Shares Purchased||Shares Owned||Amount Invested |
As you can see from the example above, VA can be tricky to pull off. You need a deep investment pool to make up for market dips. However, if this asset were to recover, the investor would have essentially bought the bottom with this strategy.
Over the long term, VA slightly outperforms DCA by increasing purchases as the value decreases and reducing purchases as the value rises.
The utility of this strategy in crypto markets is about equivalent to its utility in traditional markets. The inherent volatility of crypto markets can make this strategy much more expensive as prices tend to fluctuate wildly. These types of regular purchase strategies are best suited to assets that you want to hold long term.