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4.0 out of 5 stars
A Recommended Reference Despite Minor Flaws, April 5 2007
This review is from: Value Averaging: The Safe and Easy Strategy for Higher Investment Returns (Paperback)
Unlike many books that explain theoretical concepts but offer little in terms of practical advice, Michael Edleson's Value Averaging lays out a clear roadmap to help reach your goals. Based on his 1991 article, Value Averaging (VA) offers a viable alternative to Dollar Cost Averaging (DCA).
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.
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