Is Value-Cost-Averaging Better Than Dollar-Cost Averaging

Value-Cost-Aver­aging, VCA, in short, works some­how like Dol­lar-Cost-Aver­aging (DCA), but the amount of money inves­ted in each peri­od of time may be dif­fer­ent. VCA var­ies the amount of inves­ted money based on the price fluc­tu­ation of the fund rather than invest­ing a fixed amount at fixed inter­vals.

To illus­trate the concept of VCA, sup­pose you intent to invest $200 per month in a fund. If at the end of the first month, the fun­d’s value declines and your $200 has shrunk to $190. Then you add in $210 the next month, bring­ing the value to $400 (2*$200). Sim­il­arly, if the fund is worth $430 at the end of the second month, you only put in $170 to bring it up to the $600 tar­get. Hence, few­er shares are pur­chased when price are high and more shares are pur­chased when price are low, facil­it­at­ing the ‘buy low’ aspect of the ancient invest­ment adage, ‘buy low, sell high’.”

If you decide that you want to take advant­age of the sys­tem by wait­ing out for the market’s prices to go down, then you effect­ively become a mar­ket timer. But no one can time the mar­ket: so value cost aver­aging falls some­where between DCA and mar­ket tim­ing. It may be tedi­ous to carry out VCA com­pu­ta­tion monthly, so instead of adjust­ing the invest­ment amount each month, you may recal­cu­late it every six months or a year. As long as you fol­low the basic prin­ciple of buy more share when mar­ket is down, and buy few­er shares when mar­ket is up in a fixed inter­val, you will beat the per­form­ance of DCA.

But like any sys­tem, VCA has its draw­backs too. If the mar­ket goes into a pro­longed slump, you could end up hav­ing to make very large con­tri­bu­tions to keep your account value on track. If you’re not able to double, or even triple, your con­tri­bu­tions, you may have to aban­don your plan, or cre­ate a new one. Moreover, VCA is a self-ini­ti­ated dis­cip­line to save reg­u­larly with vary­ing amount; where­as DCA is offered by many commercial/insurace com­pan­ies that will enforce this good sav­ings habit by reli­giously deduct the fixed amount of money from your bank account. So which has a high­er suc­cess rate of reg­u­lar sav­ings?

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