Less risky, less pesky 😎
In our recent post, we’ve described the dollar-cost averaging strategy, an extremely simple long-term investment strategy. But what if you want a more profitable, yet still simple and not super risky, strategy? Then you may benefit from value averaging. Let’s explore how it works together!
It’s all about the value 💎
Just like dollar-cost averaging (remember, we call it DCA for short), value averaging (VA) is nothing new. It’s been around for a while, and you can use it for any type of asset: stocks, gold, crypto, etc.
The basic idea behind VA is making lots of smaller deals instead of a single big one. Your goal is to buy more when the price is lower and buy less when the price increases. To achieve that, you choose a fixed monthly value of your assets and stick to it. Sounds simple, though, it still requires some math. But don’t be scared, we’ll explain it in detail.
What value averaging can do for you
🎣 Encourages you to buy low and sell high, acquiring more when the prices are falling and less when they’re rising
⛈ Helps to cope with market volatility
🚙 Keeps you on a rational track, with emotions left aside. Follow the rules, and do not worry about the rest
⏰ In the long term, it may be more profitable than DCA
But be aware of the downsides too
🌀If the price keeps decreasing, you’ll fall into the trap of buying more and more every time. Setting a monthly spending limit can help in this case
🌋 In a bull market, you can earn more with DCA as you won’t have to sell when the price goes up
Putting the strategy to use 👏
Like every strategy, VA requires making several decisions from you.
1) How often are you going to invest (weekly, monthly, quarterly, etc.)?
2) How much do you want your portfolio’s value to grow by every time you invest? (For example, +€100 every month).
3) What are you going to invest in?
Value averaging in practice 🤓
Let’s say you commit to growing your portfolio’s value by €100 each month and choose Solana (SOL) as your primary asset. On February 1, you start by buying 1.023 SOL for the price of €97.77. At this moment, the value of your portfolio is €100, just as you planned 🎉
Next month, SOL’s price goes down to €88.67, and your original 1.023 SOL now only costs €90.71. Remember, as it’s the second month you’re using VA, you need to finish the month with €200 worth of SOL in your portfolio. So, you buy more SOL to make up for the decrease in price this month.
The maths 🧮️
Your portfolio goal for the second month = €200
The current value of your portfolio = €90.71
€200 - €90.71 = €109.29. You’ll need to buy €109.29 worth of SOL (1.233 SOL)
In total, now you have €200 or 2.256 SOL in your portfolio.
In the following month of April, let’s say SOL’s price increases. Now you need to buy less to reach your third month’s target of having €300 worth of SOL in your portfolio.
If SOL’s price stays the same from month to month, you’d simply buy the exact same amount for €100.
If the price skyrockets, the VA strategy will force you to sell your SOL and take a profit as your portfolio balance should grow only by the amount you commit when you start.
The process goes on, again and again, every month. Here’s an example of VA strategy:
After four months, you’d own 5.34 SOL. And, if you check our previous post, you’ll see that DCA would bring you 4.306 SOL over the same period.
At first glance, this strategy may seem more complicated, but it gets pretty simple as soon as you understand the beautiful logic behind it.
Happy value averaging, Changemakers! 🚀
While the Change team can’t provide financial advice, we’re always looking for ways to help make wealth creation accessible for all. Want us to explain more strategies? Reach out and let us know at [email protected].
Disclaimer: The information provided in this article doesn’t qualify as financial advice. Its purpose is strictly educational.