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Value Averaging: The Safe and Easy Strategy for Higher Investment Returns Paperback – Oct 27 2006
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From the Back Cover
Praise for Value Averaging
"Dollar cost averaging is making a comeback, and Mike Edleson's value averaging approach is dollar cost averaging on steroids. A must-read for serious investors willing to adhere to the principles found in these pages."
—William G. Christie, Frances Hampton Currey Professor of Finance and Professor of Law, Owen Graduate School of Management, Vanderbilt University
"Dr. Edleson's book is truly a classic that needs to be perpetuated. I have spent a significant chunk of my career trying to debunk value averaging, but with no success. I'm a believer!"
—Paul S. Marshall, PhD, Professor of Finance, Widener University
From the First Edition
"Today's best way to invest."
"Value averaging takes dollar cost averaging one step further. Besides buying low, you sell shares when the markets soar."
—The New York Times
Michael Edleson first introduced his concept of value averaging to the world in an article written in 1988. To satisfy investor interest, he wrote a book entitled Value Averaging, which further detailed this method. Following the publication of the last edition of this highly sought-after book in 1993, it has been nearly impossible to find—until now. With the reintroduction of Value Averaging, you now have access to Edleson's original work on a strategy that can help you accumulate wealth, increase your investment returns, and achieve your financial goals.
About the Author
Michael E. Edleson is a Managing Director of Morgan Stanley and oversees the firm's equity risk globally. Prior to that, he was Chief Economist of NASDAQ and a finance professor at Harvard Business School. Edleson earned his PhD at MIT.
Includes spreadsheets on a companion Web site: www.wiley.com/go/valueaveraging
Inside This Book(Learn More)
Top Customer Reviews
The author provides a convincing argument to show that VA tends to beat DCA on a single fund. Herein lies the catch. According to Mr. Edleson, the secret to the VA system is the selling of funds when the investments exceed our expectations for the given period. What's missing from the book is a scenario that includes an entire diversified portfolio, as opposed to just one fund. In that case, the periodic rebalancing would take care of the selling of funds. While I have not run test simulations like the author has, I have no reason to doubt that contributing to a diversified portfolio using DCA in conjunction with periodic rebalancing would provide returns that equal or even surpass VA in some instances.
Another minor issue is that the case study provided suffers from the same overly optimistic view that afflicts most investment books. In this case, the one fund that it used to demonstrate both DCA and VA in practice returned an annualized return of 17% over ten years! Such better than average figures tend to make any system look good!
Despite these minor flaws, Value Averaging provides some highly useful tools for planning and executing a sound investment strategy. My personal recommendation would be to read William Bernstein's "The Intelligent Asset Allocator" (he actually wrote the preface!), construct a portfolio that suits your individual goals and risk tolerance, using low MER funds. Then apply the skills you'll acquire through Edleson's book to set up a DCA plan with periodic rebalancing either 2, 3, or 4 times a year. In my opinion, this remains the surest road to financial success.
Most Helpful Customer Reviews on Amazon.com (beta)
I hardly know how to praise this book highly enough. My own mathematical skills are so poor that I periodically re-read the central chapters to remind myself of the logic I am following. But Edleson helpfully supplies some step-by-step examples of spreadsheet programs that will fully deploy the formulas he explains. This is a first rate book that deserves to be back in print at a reasonable price. But even at [the price], it's worth it.
Value Averaging can be tough going for anybody without solid undergraduate math skills, but is deliberately constructed to be utilized by anybody trained in algebra, so my suggestion would be to read through the narrations for the concepts and then go back to the chapters covering the methods you think you would like to use to attack the math. I would suggest not bothering to construct the Excel simulator unless you really think you are going to get different results than a Harvard professor and former chief economist at NASDAQ did in hundreds of tries.
Several chapters are of universal value to practical students of the stock market: a modern recalculation of performance and volatility for the market for the whole historical period of 1926-2006 is given (each generation needs this exercise to renew the debates about what type of investing produces the best yields), universal volatility ranges for the whole market are derived (a simple single range which can save you countless dollars of subscriptions to simulation softwares), and instructions are given for how to construct simulations in Microsoft Excel (most of the new content in the 2006 paperback edition describes how to translate the original spreadsheeting instructions into excel). This little book is packed with permanent value for students of all stock market systems.
Lichello's AIM investors must have this book if they are to take their ideas to the next level, and Prof. Edleson may find himself inheriting the mantle of a movement he may have been wholly unaware of before republishing his method.
First, in the long term bull market like in 1990-2000, you may find yourself underinvested and have too much money staying on the sideline because of the nature of the strategy which is to buy less or sell shares when market gets higher. In this kind of market, VA will most likely underperform DCA since it has less number of shares to ride the uptrend due to the fact that some of the shares were forced to be sold along the path (Not to mention dividend opportunity lost by selling the shares). Tried to test VA with a strong bull market like gold and found VA was way underperformed DCA. (Nothing is like DCA'ing on stock like McDonald for decades. The return is just so huge!)
Second, when your position is large and then stumble into strong bear market just like in year 2000 and 2008, you're likely to quickly run out of your buffer money you've been accumulating during the bull market. VA forces you to prematurely throw your buffer money to the bad market long before it hits the bottom and will you have extra money to cover the rest of the shortfall? (something like 20k/month or even more). If you don't, I guarantee the result will turn out worse than what you expect.
I wouldn't say this is good or bad strategy since there's pros and cons in every investing strategy. One should do his own homework before choosing strategy he's comfortable with.
In Value Averaging you determine the amount of "Value" you need to add to your investment over time based upon your goal and projected rate of return. You then add money systematically, as required, to ensure you are on track. The "twist" in Value Averaging is that if your investments exceed your target, you remove money to bring your investments back to the target level. This allows you to build a pool of money to compensate for any market corrections while profiting from any bubbles. This twist resulted in a 1% annual performance boost over Dollar Cost Averaging in the case studies.
In addition to providing an effective methodology for implementing Value Averaging, this book provides information on setting your goal(s). This is an important point which is often glossed over in other books. I would limit the amount of downward revisions I allow in the goal over time, but this is a matter for individual assessment and does not detract from the methods value.
The only thing lacking in the book is an effective guide to choosing your investment vehicle(s) (although several mutual funds are mentioned). For this I recommend that you refer to The Four Pillars of Investing by William J. Bernstein (who also wrote the Foreword for this book).