Value Averaging vs Target Allocations

[IAmNotABartender]

I am reading the comments on this post (http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/) and came across information about value averaging.  I haven't started investing yet, so right now just trying to learn as much as I can, and I had only heard of dollar cost averaging before.  I read up on value averaging, and it sounds like it's a good approach.

However, the approach I was intending to take was to invest every month with the goal of keeping allocations consistent, so as to prevent the need to rebalance during the accumulation phase.  This also would have me investing more money in cheaper vehicles every month, but without the need to sell.

Has there been any comparison of these two methods that you've seen that I could read?

[Kaspian]

I know this doesn't sound helpful, but I think most people here would agree that it matters so very little in the long run.  Just get the thing started!  It's like you're buying a car and fussing over the color of the tire iron in the trunk.  A bigger threat to you (at this moment) than "this-versus-that" comparisons is "paralysis by analysis".

You can tweak later.  (On a pre-scheduled review!!  And please not when markets get weird.)

[brandino29]

I know this doesn't sound helpful, but I think most people here would agree that it matters so very little in the long run.  Just get the thing started!  It's like you're buying a car and fussing over the color of the tire iron in the trunk.  A bigger threat to you (at this moment) than "this-versus-that" comparisons is "paralysis by analysis".

You can tweak later.  (On a pre-scheduled review!!  And please not when markets get weird.)

+1

[IAmNotABartender]

Thanks; that's a good response, but let's assume I'm asking because I want to know the actual analysis and not because I'm paralyzed.  One article I saw gave value averaging a 13% advantage over straight dollar cost averaging.

We are currently saving for a house and working on student loans, so no investments yet.  I have plenty of time to learn before we start investing.

[Kaspian]

Value averaging is definitely fancy market timing.  I'm sure it works well and may even provide better gains.  13%?  I'd be skeptical about that.  (They could show you a chart where it worked really well for a given fund but hide another fund wish totally sucked at it.)  Personally, I wouldn't bother having a special bucket of cash sitting waiting for a certain percentage change down to pull the trigger.  And you'd need to have it automated to keep your own emotions out of the equation.    (The same as a market "call option", really.)  In the same vein, "buying the dips," also seems to work over the long haul.  I guess it's all how passive/active an investor you want to be?  Hopefully somebody here has tried value averaging and can give you some advice about it.

[Kaspian]

You got me curious, so I found a whitepaper at:  http://www.studyfinance.com/jfsd/pdffiles/v13n1/marshall.pdf

This was the final outcome.  (If I'm reading it correctly) 0.11% difference isn't much to worry about.  It also doesn't touch on the individual's psychology (which is possibly the most important thing in investing).  DCA people quickly adapt to their monthly/bi-weekly draws.  A VA-ger would go through some weird mental cycles when either buys started happening or cash began to accumulate to a massive pile while waiting.  ...My opinion, anyway.