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?