How to Value Average

Step-by-Step Guide

1. 1

   Step 1: Select an asset for value averaging.

   Value averaging works well for most assets, though it may require selling at times.
   
   Therefore, value averaging works best for an asset where the trading costs (both buying and selling) are low, and in a tax-sheltered account, such as a 401(k) or IRA, so the occasional selling does not generate capital gains taxes.
   
   High volatility, or beta, is a plus, because it offers better opportunities for buying low and selling high.
   
   Ideally, the asset should be of somewhat high quality, so the chance of it blowing up overnight is minimal; high-quality dividend stocks and index funds are therefore good candidates.
   
   Remember, if the asset goes to zero, value averaging will not work.
2. 2

   Step 2: Determine the amount of your initial investment.

   For example, you can decide to start with a $500 initial investment. , How often do you want to invest? Consider trading costs, time and energy you plan to devote to investing.
   
   Monthly investments work well for most people.
   
   If you prefer to trade less often, quarterly is a good choice. , Consider how much you can and are willing to invest each time.
   
   For example, if you would like the market value of your position to increase by $500 every month, can you afford to invest two or three times as much into the position should the market price drop? If so, you may choose to increase your position's market value by $500 per month. , For example, say you decide to invest $500 in a stock or fund selling at $10 per share.
   
   Record $500 as the value of your initial investment, $10 for the market price, and 50 for the number of shares bought. , If you had determined to increase the value of your position by $500, the value required in our example would be $1000 ($500 initial + $500 increase). , Say the new market price is now $8. , In our example, that would be $1000/$8 =
   125. , In our example, that would be 125
   - 50 =
   75. , In this example, you would need to buy 75 shares at $8/share, investing $600 during this investment period.
   
   At this point, the value of your investment is $1000, market price is $8/share, number of shares is 125, and your cost basis is $1100, or $8.80/share.
   
   Note that this is lower than the average market price of the investment ($9, the average of $10 and $8).
   
   This lower-than-market cost basis per share is the whole point of value averaging. , Determine the new value required ($1500 for the third investment period, $2000 for the fourth, $2500 for the fifth, and so forth), the new market price, the shares you need to own, and the number of shares you need to buy.
   
   See the tables below for examples of value averaging results in rising, declining, and fluctuating markets.
   
   Note that you always end up with a lower cost basis than the average market price under any market conditions.
3. 3

   Step 3: Determine your investment intervals.

4. 4

   Step 4: Determine how much you would like the market value of your position to increase every investment period.

5. 5

   Step 5: Make your initial investment

6. 6

   Step 6: and record the value of your initial investment

7. 7

   Step 7: the market price

8. 8

   Step 8: and shares bought.

9. 9

   Step 9: During the next investment period

10. 10

    Step 10: determine the value required.

11. 11

    Step 11: Look up the current market price of the asset.

12. 12

    Step 12: Determine the shares you need to own

13. 13

    Step 13: by dividing the value required by the current market price.

14. 14

    Step 14: Determine the number of shares you need to buy

15. 15

    Step 15: by subtracting the shares you currently have from the shares you need to own.

16. 16

    Step 16: Buy that number of shares at the current market price.

17. 17

    Step 17: Repeat the process during subsequent investment periods.

Detailed Guide

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