To avoid getting trapped into following the herd mentality of the market, it pays to check out the investment strategy known as value averaging, a systematic investment strategy for a higher rate of return. Although this value averaging strategy has been around for some time, it is probably true to say that many investors are not aware of its existence. Due to better promotion by financial planners and mutual fund agents, the dollar cost averaging strategy has always been the better known and more popular investment technique among investors.
It is always a wonder to me that despite the promotion of safe and tested investment strategies such as the dollar cost averaging and value averaging, there are still so many sob stories in the financial market of retail investors losing heavily in the stock markets, investors who had allowed themselves to be trapped into following the psychology of the market by buying high due to the greed factor and then selling low due to the fear factor.
Value averaging may be the lesser known version of the investment strategies, but it would be advantageous to know that research has shown that this strategy gives a higher investment rate of return than dollar cost averaging for the reasons listed below:-
1. One major reason is that this value averaging investment strategy takes dollar cost averaging one step further. Besides buying low, this strategy also gives signals to sell when the market soars. This strategy systematically shows you how to make the buying and selling of your investments nearly automatic, therefore relieving you of the need for market timing and stock picking skills.
2. Due to the buying and selling mechanism of this strategy, for investment over a longer time period, the total cost per share with this technique is therefore always lower. Generally therefore, it has been shown to have a higher rate of return than the other investment strategies.
It is my belief that understanding and implementing the available investment techniques are vital in the financial education process. Value averaging as a systematic investment strategy therefore should not be excluded as a financial topic in schools and colleges. Taking advantage of its tested and proven ability to generate a better investment rate of return will certainly go a long way in helping you to achieve your financial planning objectives.