by Charles Idol
Everyone knows the secret of successful investing: buy low and sell high. Unfortunately, that rule
requires accurate market predictions. If clouds obscure your crystal ball, it would be to your advantage to
consider the merits of the averaging systems.
Dollar averaging has been advocated for a long time as a conservative, reasonably successful system
which takes some advantage of market cycles, surpasses the "buy it and forget it" syndrome and requires
almost no thought on the part of the investor. Value averaging requires a little more work, participates
more deeply in the market cycle and appears to outperform dollar averaging.
The dollar averaging system requires only that you choose a security in which you wish to invest a fixed
amount of money at regular intervals, usually every month. Usually, dividends or distributions are
re-invested. Very simple in application, the method lends itself to a budget for investment and takes
advantage of market cycles because you purchase more shares per unit time in the low portions of the
cycle and fewer in the high portions. However, you need cyclical market behavior and you must
participate over at least one cycle.
Value averaging requires that you choose a security in which you wish to have your equity increase by a
fixed amount at regular intervals, again usually every month. To implement this method, you begin by
investing the budgeted amount. At the start of the next month, you multiply the current share value by the
number of shares you hold to see how much you must invest to increase your equity by the amount of