Value cost averaging, what is it. It is a cross between Dollar cost averaging and a Constant dollar Plan, with a twist. Here is a beginning description on it. http://www.invest-faq.com/articles/strat-dol-val-avg.html , Here is more in depth coverage, http://www.tmag.com/jfsd/pdffiles/v13n1/marshall.pdf , this is a pdf file so you need the free adobe reader. http://www.adobe.com/products/acrobat/readstep.html There are a lot of articles here. http://tmag.com/jfsd/index.html Also here http://www.efficientfrontier.com/ . In Value Averaging, by Michael Edleson, He starts out discussing What (He feels) are the shortcoming of DCA, which are different than mine. He says that DCA does not include a growth factor for inflation (your monthly investment do not increase), nor is DCA concerned as to whether you will or will not reach your retirement goals His spreadsheet growth_dca covers this. He then went on to say that there are times when one would want to increase the amount that one invested in the market, like at the bottom of bear markets. This is the constant dollar plan part. He then went on to introduce his second Growth factor, Instead of using a constant dollar value, he uses a dollar value that grows at the market rate. With this he came up with his spread sheet Va_readjustment. When you run this spread sheet, you put in the present value of your portfolio, your two growth rates, what your retirement goal is and how many periods you have left. The main output is called value path. This is what your portfolio should be worth at the beginning of each month. Michael Edleson recommends keeping the growth rates low in the early years of your investment plan, I second that.
Before I got a chance to read the book I made a spread sheet called vca_gainloss, that spreadsheet only increases the dollar value. One of the negative's of Value Cost Averaging Is if you use the original rules when the stock value goes above the dollar value you sell stock. If you have had a Deep Diver stock you could start getting sell signals at a price below Average cost. I did not realize this at first, my spread sheet also has this problem. When I get a chance I will fix this. And let you know, that should boost the profits a little. Also the original rules did not include any buy/sell percentages, it try's to do it right away. Last but not less, He does not give you a method of coming up with the extra funds you will need, I used Mr. Lichello method of spiting the monthly investment into two parts, 75% to go in now and 25% held in reserve. It seemed to work out ok.
Hi all, today I got the formula that dripadvisor had been using. I guess the new owner did not want it on the site. I found the old web page here. http://webdev.archive.org/index.php Here is the information.
As a DRIP investor, you already know that the key to superior long term returns is the ability to invest every month. This form of consistent investing, regardless of ups or downs in your portfolio, helps average your purchase price down without worrying about timing the market.
The DRIP Advisor has taken this common approach and put it on steroids. By using a proven mathematical approach, the DRIP Investment Calculator can increase your long-term returns dramatically! DRIP Investment Calculator (DRIPIC) automatically calculates a percentage of your normal investment amount to invest at the current time. By varying the investment amount based on the stock's current price, 52-week moving average, and the growth rate of the company, DRIP Investment Calculator increases your long term returns one investment at a time.
You may have seen other formula driven investment approaches, such as the Moneypaper's Invest%. Our research shows these methods will decrease your returns, compared to the DRIP Investment Calculator and even regular dollar cost averaging.
Compare the results of the three investment approaches, then check out the latest results of the DRIP Investment Calculator.
If you are interested in the equation behind the DRIP Investment Calculator, read the next section to find out the specifics. To understand how the DRIP Investment Calculator works, we must first establish a small number of known points:
Stocks appreciate at a normalized rate over a given period of time. Example: the average large cap stock has appreciated 18.6% per year for the past 10 years, and about 12.6% a year for the past 70 years. Because of this normalized appreciation, stocks tend to set new highs and trade near them a majority of the time. Due to the nature of our markets, stocks will trade in ranges, offering opportunities during which buying is optimal. The range over which a stock trades becomes increasingly large as expected return increases. This is why Exxon trades in a relatively small range compared to a Yahoo.
A number of investment techniques have been developed over the years, attempting to take advantage of these valuation bounds. Lump sum investing takes advantage of point 1, hoping that stocks will continues to appreciate beyond the current price. This form of investing however, requires large amounts of cash up front, does not allow for subsequent investment, and does not optimally utilize the trading ranges of stocks.
Dollar cost averaging relieves the investor of the need for a lump-sum investment, while allowing for subsequent investments. It somewhat takes advantage of a stock's trading range, buying more shares when the price is low, and less when it is high, but does not optimize the amount of capital invested.
Invest% is a technique developed by the Moneypaper. This technique attempts to optimize the amount of capital used at the current price based on the 52-week high and 52-week low. By assigning an investment value of 50% the normal capital to the high and 150% to the low, Invest% calculates a percentage of capital to invest at the current time. Unfortunately, this technique for the most part ignores the fact that stocks appreciate normally over time and tend to set new highs, thus putting less than the optimal amount of capital to work.
In researching these, and other methods, The DRIP Advisor has developed the most advanced DRIP investment technique to date. The formula used for the DRIP Investment Calculator was developed using actual historical performances of randomly selected stocks, and then back tested with a separate group of stocks. The formula begins with the fact that stocks tend to normally appreciate. Given this, the calculator finds the 52-week moving average for a given stock by using weekly historical data. This gives a more relevant measure than using the high and low, as the high and low may be skewed by extraordinary events. The 52-week moving average is then used to calculate an "expected price." The expected price is the 52-week moving average plus half of the "expected return" of the stock. If a stock were to perform in a linear method (a straight line), this "expected price" would be the same as the current price. However, stock prices are not straight lines, and this "expected price" will give us a comparison point for the current price. Here is a brief example of the expected price calculation:
The difference between the current stock price and the "expected price" is taken now, and divided by the "expected price," to arrive at a "valuation deviation."
Current price = $84.50 Current price- Expected price = -$1.99 Valuation deviation = -$1.99 / Expected Price = -2.3%
At this point, we could just subtract the deviation from the expected price from 100% and find an percentage of capital to invest (in this case 102.3%). However, this would ignore point 4: the higher the expected return of a stock, the greater the range over which it trades. Due to this fact, the "valuation deviation" is divided by a fraction of the expected growth rate. To illustrate why this is done, assume Stock A is expected to grow at 12%, and Stock B is expected to grow at 15%. Stock A will tend to trade over a narrower range than Stock B, and thus will require a greater multiplication of the deviation to give your investment its "steroids." Continuing the example:
The deviation has now been inflated in-line with the expected growth rate. For the one final step we will subtract this number from 100% to arrive at the "Suggested Investment Amount."
As you can see, the DRIP Investment Calculator has taken advantage of each of the characteristics of stock price performance. Over time, the DRIP Investment Calculator invests near 100% of the amount you would invest with regular dollar cost averaging, it simply optimizes the time when that capital is used.
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