Newspaper Page Text
Walue averaging to reduce risk
Luke
Haymond
\ J .. ■■■.<•':Wil
Hany investors are familiar with
by “dollar-cost-avcrag
ifc,” which involves investing a
f red dollar amount at specified
ii tervals, whether the market is up
of down. DCA is a powerful tool
I systematic savings.
I Iprces investors to buy more
scares when prices are lower and
f|wer shares when prices are high
thereby potentially lowering the
I erage cost per share.
Value averaging, like DCA,
lies on time, rather than timing,
t 6 protect the investor from mar
ket, swings. Under VA, the
investor sets a target value for his
or ner investment at specified
periods. Then enough shares are
pptchased or sold to meet the
value target.
VA, unlike DCA, results in vary
ing amounts being invested each
period. Under VA, the dollar
amount invested and shares pur
chased will be up when prices are
down. Conversely, purchases will
be smaller, and sales might occur,
if prices rise. VA, however, may
be compatible with investors who
want to invest a fixed dollar
amount every period. These
investors could, after careful con
sideration and reading a prospec
ts consider a family of mutual
funds and deposit any sums not
actively invested into the family’s
money market fund to act as a
reserve for future purchases in
excess of the fixed amount.
Fbr example, let us say that our
investor wants to have a portfolio
Os $4,000. Under VA, the investor
targets a portfolio value of SI,OOO
fqr'January (the initial invest
ment), $2,000 for April, $3,000
for July and $4,000 for October.
The table below summarizes how
a'VA approach would work (dis-
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regarding taxes and transaction
costs).
After one year the investor has
committed $3,597 to the VA pro
gram. Based on the $11.50 price,
the investment is worth $4,187 for
a 16% pre-tax return.
Had the investor adopted a DCA
approach on a similar schedule he
or she would have invested $4,000
in a portfolio worth $4,519 and
the pre-tax return would have
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been 13 percent.
VA is another powerful tool to
encourage systematic savings.
Some caveats are in order. First
VA requires a more sophisticated
investor. Second, transaction
costs are a greater factor in VA
than DCA. Third, since both pur
chases and sales are possible,
taxes must be considered. Fourth,
investors are reminded that dollar
cost and value averaging do not
Shares
Share Cumulative Target Purchased Dollars
Quarter Price Shares Investment (Sold) Invested
January $lO 100 SI,OOO 100 SI,OOO
April 11 181.82 2,000 81.82 900
July 9 333.33 3,000 151.51 1,364
October 11 363.64 4,000 30.31 333
January 11.50
assure a profit and do not protect
against loss in declining markets.
Finally, since they involve contin
uous investments in securities
regardless of fluctuating price lev
els of such securities, investors
FORSYTH COUNTY NEWS WxJn—<toy, Jun* 10, 1 M-
should consider their ability to
continue purchases through peri
ods of low price levels. Check
with your financial planner about
the benefits of dollar-cost and
value averaging.
Luke Haymond and Mike
Antonio are financial planners
with Robert Thomas Securities,
Cumming. For additional infor
mation, you may contact their
office at (770) 844-0020
PAGE 7A