Value Averaging: The Safe and Easy Strategy for Higher Investment Returns

Foreword by William J. Bernstein ix

Preface to the 2006 Edition xiii

Preface to the 1993 Edition xix

Introduction 1

1 Market Risk, Timing, and Formula Strategies 3

RISK AND MARKET RETURNS 3

Market Returns over Time 3

Distribution of Market Returns 9

Risk and Expected Return 13

MARKET TIMING AND FORMULA STRATEGIES 20

Timing the Market 20

Automatic Timing with Formula Strategies 21

ENDNOTES 23

2006 NOTE 24

2 Dollar Cost Averaging Revisited 25

DOLLAR COST AVERAGING: AN EXAMPLE 26

SHORT-TERM PERFORMANCE 28

Over One-Year Periods 30

Over Five-Year Periods 32

LONG-TERM PROBLEMS WITH DOLLAR COST AVERAGING 34

Growth Equalization 35

SUMMARY 36

ENDNOTES 37

3 Value Averaging 39

VALUE AVERAGING: AN INTRODUCTION 39

SHORT-TERM PERFORMANCE 43

LONG-TERM PERFORMANCE AND VALUE AVERAGING 47

Linear, or Fixed-Dollar, Strategies 47

Adjusting Strategies for Growth 51

SUMMARY 53

ENDNOTES 54

2006 NOTES 55

4 Investment Goals with Dollar Cost Averaging 57

BACKGROUND 57

Lump-Sum Investments 57

Using the Formula 59

Annuities: Periodic Investments 60

Dollar Cost Averaging and Annuities 63

READJUSTING THE INVESTMENT PLAN 63

The Readjustment Process 64

Flexibility 66

Down-Shifting Investment Risk 69

GROWTH-ADJUSTED DOLLAR COST AVERAGING 71

Exact Formula 72

Approximate Formula 74

Readjusting the DCA Plan 75

SUMMARY 80

ENDNOTES 80

Appendix to Chapter 4: Constructing a DCA Readjustment Spreadsheet 83

5 Establishing the Value Path 87

VALUE AVERAGING VALUE PATHS 87

The Value Path Formula 88

Flexible Variations on the Value Path Formula 89

Readjusting the VA Plan 92

A Cautionary Note 93

An Alternate Method 93

SUMMARY 94

ENDNOTES 95

Appendix to Chapter 5: Constructing a VA

Readjustment Spreadsheet 97

6 Avoiding Taxes and Transaction Costs 101

TAX CONSIDERATIONS WITH VALUE AVERAGING 101

The Advantage of Deferred Gains 101

Deferring Capital Gains Taxes: An Example 102

A Compromise: No-Sell Value Averaging 107

REDUCING TRANSACTION COSTS 111

Limiting Taxes 111

Limiting Costs 112

SUMMARY 113

ENDNOTES 114

7 Playing Simulation Games 117

WHY SIMULATIONS? 117

WHAT AND HOW? 118

Parameters 118

Expected Return 119

Expected Variability 120

Randomness 120

CONSTRUCTING THE SIMULATION 121

An Example 122

ENDNOTES 126

Appendix to Chapter 7: Constructing a Simulation 129

2006 NOTE 131

ENDNOTES TO APPENDIX TO CHAPTER 7 133

2006 NOTE 134

8 Comparing the Strategies 135

FIVE-YEAR SIMULATION RESULTS 135

Using Growth Adjustments 139

No-Sell Variation 142

Volatility 143

TWENTY-YEAR SIMULATION RESULTS 145

SUMMARY 146

ENDNOTES 147

9 Profiting from Overreaction 149

TIRING OF A RANDOM WALK 149

Mean Reversion and Overreaction 150

A Brief Look at the Data 151

WHY DOES THIS MATTER? 160

Timing 161

ENDNOTES 164

2006 NOTE 167

10 Details: Getting Started 169

USING MUTUAL FUNDS 169

The Fund versus Stock Choice 169

Index Funds 171

Information on Specific Funds 172

WORKING OUT THE DETAILS 175

Using a Side Fund 176

Operating Within a Retirement Account 177

Establishing a Value Path 178

2006 NOTE 180

Setting Up a VA Value Path: An Example 181

Other Important Considerations 184

Using Guidelines and Limits 185

NOTES FOR FINANCIAL PLANNERS 186

Advanced Methods 187

SUMMARY 189

ENDNOTES 189

2006 NOTE 191

11 Examples: Strategies at Work 193

THE GOAL AND INVESTMENT ENVIRONMENT 194

Choosing an Investment 194

Setting the Goal (Dealing with Inflation) 197

How Much Should He Invest? 199

INVESTMENT RETURN & TAXES 200

Expected Return 200

Taxes 200

IMPLEMENTING DOLLAR COST AVERAGING 202

1981: Setting Up DCA 203

1982–1983 Investment Results 205

1983: Reassessment and Readjustment 205

The 1985 Readjustment 211

And So On and So On . . . 212

Wrapping It Up: 1991 Results 214

IMPLEMENTING VALUE AVERAGING 215

Establishing the Value Path 215

1983: Readjusting the VA Plan 217

Future VA Readjustments 219

VA Investments 220

SUMMARY 225

KEY FORMULAS 226

ENDNOTES 227

12 A Final Word 229

Index 231