What it is:
Value averaging is a strategy in which an investor places a variable dollar amount into a given common stock) on a regular to ensure that the investment grows by a certain dollar amount or percentage over time.(usually
The investment generally takes place each and every month regardless of what is occurring in the financial markets.
How it works (Example):
Let's assume John Doe has $5,000 in his new-car account. He wants that to grow to $10,000 by the end of next. Accordingly, he needs the account to grow by $416 a month.
If John uses a value averaging approach, he would invest the $5,000 in, say, the ABC mutual fund at the beginning of the year. If at the end of month one the has earned, say, $100, then John contributes only $316 that month. At the end of the second month, if the fund has earned only $50, then John contributes $366 that month. If in the third month the fund loses him $75, then John contributes $491. In this way, John ensures that the account balance equals $10,000 at the end of the year.
Why it Matters:
Value averaging is useful for people who contribute to theiron a regular , and it helps eliminate the temptation to try to time the . Additionally, it provides some peace of mind that the investor indeed have the desired amount at the end of the period.
Note that in our example, however, as the