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Dollar Value Averaging

Dollar Value Averaging (DVA) was developed by Professor Michael E. Edleson. Instead of investing a fixed amount on a regular basis as depicted in the Dollar Cost Averaging (DCA) model, the DVA model varies the investment amount based on the value of the portfolio.

When the market goes up, you invest less and buy fewer units. When the market goes down, you invest more and buy more units. Makes sense doesn't it?

How DVA works

The amount you invest depends on a predefined portfolio value. You invest an amount that will bring your total portfolio value to the target value.

It has also been proven statistically that dollar value averaging is better than dollar cost averaging.

Example: Dollar Value Averaging
Merry has a goal to save $7,000 in 1 year as down payment for a house. He plans to save this money by investing in a mutual fund. He plans to increase his portfolio value by $500 a month. He expects the rate of return to be 0.8% a month. This is his investment table.

Note: This is only his investment plan. The actual investment is shown in another table.

Month	Portfolio Value brought forward	Rate of Return 0.8%	Contribution	Target Portfolio Value
1	$0.00	$0.00	$600.00	$600.00
2	$600.00	$4.80	$600.00	$1,204.80
3	$1,204.80	$9.64	$600.00	$1,814.44
4	$1,814.44	$14.52	$600.00	$2,428.96
5	$2,428.96	$19.43	$600.00	$3,048.39
6	$3,048.39	$24.39	$600.00	$3,464.65
7	$3,464.65	$29.38	$600.00	$4,302.16
8	$4,302.16	$34.42	$600.00	$4,936.58
9	$4,936.58	$39.49	$600.00	$5,576.07
10	$5,576.07	$44.61	$600.00	$6,220.68
11	$6,220.68	$49.77	$600.00	$6,870.45
12	$6,870.45	$54.96	$74..59	$7,000.00
Total		$325.41	$6,674.59	$7,000.00

From his plan, Merry will invest a total of $6,674.59 over 12 months and earn a total return of $325.41 giving him a total portfolio value of $7,000.00 at the end of 1 year.

Next we show you how Merry will invest using the dollar value averaging technique given that the market price fluctuates every month.

Month	Target Portfolio Value (a)	Market Price per Unit (b)	Total Units (c)	Portfolio Value brought forward (d = b x c)	Contribution (e = a - d)	Units Bought (e/b)	Portfolio Value carried forward
1	$600.00	$15.20	$0.00	0.00	$600.00	39.47	$600.00
2	$1,204.80	$15.30	39.47	$603.95	$600.85	39.27	$1,204.80
3	$1,814.44	$15.70	78.75	$1,236.30	$578.14	36.82	$1,814.44
4	$2,428.96	$16.00	115.57	$1,849.11	$579.85	36.24	$2,428.96
5	$3,048.39	$15.50	151.81	$2,353.06	$695.34	44.86	$3,048.39
6	$3,672.78	$15.00	196.67	$2,950.05	$722.73	48.18	$3,672.78
7	$4,302.16	$14.60	244.85	$3,574.84	$727.32	49.82	$4,302.16
8	$4,936.58	$14.50	294.67	$4,272.69	$663.89	45.79	$4,936.58
9	$5,576.07	$15.10	340.45	$5,140.85	$435.22	28.82	$5,576.07
10	$6,220.68	$15.80	369.28	$5,834.56	$386.12	24.44	$6,220.68
11	$6,870.45	$16.20	393.71	$6,378.17	$492.28	30.39	$6,870.45
12	$7,000.00	$16.40	424.10	$4,955.27	$44.73	2.73	$7,000.00
Total					$6,526.46	426.83	$7,000.00

Notice that when the market price increases in months 3 and 4, Merry invests less money and buys less units to reach his target value.

And in months 6 and 7 when the market price drops, Merry invests more money and buys more units to reach his target value.

Unlike dollar cost averaging, dollar value averaging takes into account the rate of return. Also, the investor changes his contribution amounts based on market information.

The downside of DVA is that the investor could incorporate an unrealistic rate of return on this investment. And when the market doesn't perform to expectations, the gap between the target portfolio value and the actual portfolio value will widen. The investor will find himself needing to contribute more and more very period just to stay within the target of his investment portfolio.

Given proper planning and follow-ups, following the dollar cost averaging technique will yield greater returns compared to dollar cost averaging.

Next: Why dollar value averaging is better than dollar cost averaging.