Value Averaging

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

• Foreword by William J. Bernstein ixPreface to the 2006 Edition xiiiPreface to the 1993 Edition xixIntroduction 11 Market Risk, Timing, and Formula Strategies 3Risk and Market Returns 3Market Returns over Time 3Distribution of Market Returns 9Risk and Expected Return 13Market Timing and Formula Strategies 20Timing the Market 20Automatic Timing with Formula Strategies 21Endnotes 232006 Note 242 Dollar Cost Averaging Revisited 25Dollar Cost Averaging: An Example 26Short-term Performance 28Over One-Year Periods 30Over Five-Year Periods 32Long-term Problems with Dollar Cost Averaging 34Growth Equalization 35Summary 36Endnotes 373 Value Averaging 39Value Averaging: An Introduction 39Short-term Performance 43Long-term Performance and Value Averaging 47Linear, or Fixed-Dollar, Strategies 47Adjusting Strategies for Growth 51Summary 53Endnotes 542006 Notes 554 Investment Goals with Dollar Cost Averaging 57Background 57Lump-Sum Investments 57Using the Formula 59Annuities: Periodic Investments 60Dollar Cost Averaging and Annuities 63Readjusting the Investment Plan 63The Readjustment Process 64Flexibility 66Down-Shifting Investment Risk 69Growth-adjusted Dollar Cost Averaging 71Exact Formula 72Approximate Formula 74Readjusting the DCA Plan 75Summary 80Endnotes 80Appendix to Chapter 4: Constructing a DCA Readjustment Spreadsheet 835 Establishing the Value Path 87Value Averaging Value Paths 87The Value Path Formula 88Flexible Variations on the Value Path Formula 89Readjusting the VA Plan 92A Cautionary Note 93An Alternate Method 93Summary 94Endnotes 95Appendix to Chapter 5: Constructing a VA Readjustment Spreadsheet 976 Avoiding Taxes and Transaction Costs 101Tax Considerations with Value Averaging 101The Advantage of Deferred Gains 101Deferring Capital Gains Taxes: An Example 102A Compromise: No-Sell Value Averaging 107Reducing Transaction Costs 111Limiting Taxes 111Limiting Costs 112Summary 113Endnotes 1147 Playing Simulation Games 117Why Simulations? 117What and How? 118Parameters 118Expected Return 119Expected Variability 120Randomness 120Constructing the Simulation 121An Example 122Endnotes 126Appendix to Chapter 7: Constructing a Simulation 1292006 Note 131Endnotes to Appendix to Chapter 7 1332006 Note 1348 Comparing the Strategies 135Five-year Simulation Results 135Using Growth Adjustments 139No-Sell Variation 142Volatility 143Twenty-year Simulation Results 145Summary 146Endnotes 1479 Profiting from Overreaction 149Tiring of a Random Walk 149Mean Reversion and Overreaction 150A Brief Look at the Data 151Why Does This Matter? 160Timing 161Endnotes 1642006 Note 16710 Details: Getting Started 169Using Mutual Funds 169The Fund versus Stock Choice 169Index Funds 171Information on Specific Funds 172Working Out the Details 175Using a Side Fund 176Operating Within a Retirement Account 177Establishing a Value Path 1782006 Note 180Setting Up a VA Value Path: An Example 181Other Important Considerations 184Using Guidelines and Limits 185Notes for Financial Planners 186Advanced Methods 187Summary 189Endnotes 1892006 Note 19111 Examples: Strategies at Work 193The Goal and Investment Environment 194Choosing an Investment 194Setting the Goal (Dealing with Inflation) 197How Much Should He Invest? 199Investment Return & Taxes 200Expected Return 200Taxes 200Implementing Dollar Cost Averaging 2021981: Setting Up DCA 2031982–1983 Investment Results 2051983: Reassessment and Readjustment 205The 1985 Readjustment 211And So On and So On 212Wrapping It Up: 1991 Results 214Implementing Value Averaging 215Establishing the Value Path 2151983: Readjusting the VA Plan 217Future VA Readjustments 219VA Investments 220Summary 225Key Formulas 226Endnotes 22712 A Final Word 229Index 231