FinanceMind » Investment » Dollar Value Averaging vs Dollar Cost Averaging

Dollar Value Averaging is better than Dollar Cost Averaging

Many studies have been conducted to compare dollar value averaging and dollar cost averaging to determine which investing technique will yield greater returns. And the general consensus is dollar value averaging is the better investing technique.

Let’s analyze the example below and you will understand why.

Example: Dollar Vost Averaging
Betty would like to invest $500 a month for 4 months. Assume for now there is 0% returns, and the market price doesn't fluctuate.

Using dollar cost averaging, Betty will contribute $500 a month for 4 months and end up with a portfolio value of $2,000.

The target value of the portfolio for month 1 is $500, month 2 is $1,000, month 3 is $1,500 and month 4 $2,000.

Using dollar value averaging, and because the market price doesn’t change, Betty will also need to contribute $500 a month for 4 months and end up with a portfolio value of $2,000.

However, if the market price changes, then their investment will be different.

		Dollar Cost Averaging			Dollar Value Averaging
Month	Market Price	Contri- bution	Units Bought	Portfolio Value	Total Units	Portfolio Value brought forward	Contri- bution	Units Bought	Portfolio Value carried forward
1	$10.00	$500	50.00	$500	0	$0.00	$500	50.00	$500
2	$13.00	$500	38.46	$1,150	50.00	$650	$350	26.92	$1,000
3	$8.00	$500	62.50	$1,208	76.92	$615	$885	110.58	$1,500
4	$10.00	$500	50.00	$2,010	187.50	$1,875	$125	12.50	$2,000
Total		$2,000	200.96	$2,010	200.00		$1,860	200.00	$2,000

DCA has a final portfolio value of $2,010 compared to DVA portfolio value of $2,000
DCA has total 201 units while DVA has 200 units.
DCA investment cost $2,000 while DVA investment cost is $1,860.

Though the DCA has a portfolio value of $10 higher and 1 unit more than DVA, however, the amount invested is $140 more than DVA. This clearly shows that dollar cost averaging is superior to dollar cost averaging. This is because in DVA the investor invests more when prices are low and he invests less when prices are high.

If you have time to keep track and follow-up on your portfolio, then following the dollar value averaging will yield greater returns for you. However, if you are too busy, then follow the dollar cost averaging. Though your returns will be lower but investing is still better than not investing.