Should Investors Consider Value Averaging?

In The Four Pillars of Investing, William Bernstein describes a concept known as "value averaging," which is an alternative to dollar-cost averaging. While both approaches are strategies for investing a sum of cash incrementally, value averaging adds an appealing twist to traditional dollar-cost averaging. With value averaging, more dollars are invested when the market is low and fewer dollars when the market is high. In contrast, with traditional dollar-cost averaging, each investment is equal in size, regardless of whether the market is high or low.

Because of that difference, Bernstein sees value averaging as a superior approach. However, if you Google the term "value averaging," you'll find quite a bit of debate about whether or not it is actually superior to traditional dollar-cost averaging.

My view is that there is no "right" or "wrong" here. Since the market, on average, has always exhibited an upward trend, investors are statistically better off investing any sum of cash all at once and not delaying. For that reason, all incremental approaches are not mathematically-based. Instead, they are behavioral strategies, to avoid the regret that could result from a rapid market drop immediately after investing a large lump sum.

Because incremental strategies are not mathematically-based, there is no scientific way to choose one formula over another. I see the appeal of value averaging, but it's not necessarily the only or best way; it is just one of many similar strategies.