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The Value Averaging Investment Strategy

How Value Averaging Works

Michael E. Edleson, a former Harvard finance professor, used simulations to compare the Value Averaging method to Dollar Cost Averaging (DCA) and also to the purchases of a constant number of shares in every investment period. While potential differences in risk were not considered, he concluded that Value Averaging provided investors with “an inherent rate of return advantage” in keeping with the time-honored recommendation to “buy low and sell high.”

Edleson, who was also a former Nasdaq Chief Economist, feels that a missing ingredient has been added to DCA that makes Value Averaging a superior method – focusing on a portfolio’s anticipated rate of return, which assists in pinpointing periods of under and over-performance in the stock market.

Dollar cost averaging is based on the principle that, rather than investing a large sum of money at one time, you should make small investments over a designated time period. For example, if you had $12,000 on January 1st that you planned to invest, you would invest $1,000 on a monthly basis through to December. It is felt that your risk would be reduced, especially in times of high volatility, because you would be purchasing stocks in a range of prices over a 12-month period, rather purchasing all of the shares in a lump sum for the same price.

With the Value Averaging strategy, whenever a portfolio under-performs, the share prices will probably also be low, and investors will therefore have to make a larger investment to make up for the under-performance. The converse is also true, and if the portfolio outperforms it’s targeted rate of return, share prices will tend to be high as well, and that is not the time to purchase more shares. Investors may even profit from a sale, as long as they are guided by the portfolio target value, which is a calculated value. While dollar cost averaging has no rules for selling, value averaging forces sales when prices rise sharply and forces larger purchases – more shares purchased – when prices fall.

Value Averaging definitely proves its worth and works best when the stock market is highly volatile, because it forces investors to be disciplined when they invest.


Using Value Averaging

VA is a formula based investment technique, where a mathematical formula is used to guide how much is invested into a stock at a specific time. VA’s goal is to increase a stock’s value, rather than its market price, by a calculated amount on a periodic basis.

To begin, you determine the amount of money you will need to set aside to reach a particular goal, such as financing your retirement. Next, based on the yearly return you expect to realize on what you invest, you calculate what you will have to invest every month in order to attain that goal. For example, if you plan on accumulating $500,000 within a 20-year period and determine that you can earn 8% annually, you would need to set aside approximately $875 each month. This would enable you to track your progress toward that goal on a month-by-month basis.

Note that with this method, the emphasis is on establishing a portfolio target value or “value path”. For example, suppose that at the end of the 12th month you realize that your portfolio value should be at $10,950 according to your plan, but because of a downturn in the stock market, it is only worth $10,000. This indicates that in the following month, you should invest an additional $950 along with your usual $875 for a total of $1,825 in order to stay on track.

Realistically, this is a procedure that you would follow every month, and whenever you fall behind, you would add to your monthly investment. By way of contrast, whenever the return on your investment was higher than you expected and your portfolio was worth more than the pre-determined value, that would be the time to reduce your usual investment or consider selling some of your stock.

Value averaging can also be modified so that no sales take place, which is important when investing in non tax-sheltered accounts.


What You Can Expect

Value averaging has been proven to work better than DCA in almost all market conditions, the benefits of which are really accentuated in a highly volatile market.

Under the Value Averaging approach, the ending portfolio value will be pre-determined before you start your investing program, so as in our example above the ending value is $500,000. In other words, when you start the value averaging program, the ending amount is known, but the amount to be invested monthly varies.

Under the Dollar Cost Averaging approach, the total portfolio value at the end of the period could be any value, but the total amount to be invested is fixed – in this example, 12 months times 20 years times $875, for a total amount invested of $210,000. When you start a dollar cost averaging program, the amount to be invested is known, but the ending amount isn’t.

In summary, Value Averaging is an investment strategy that provides a high probability for investors to reach their investment goals and it is a promising investment technique that merits broader attention from financial advisors, financial institutions and the investing public.

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Buy and Hold Investment Strategy

Before expanding on the questionable value of “buy and hold”, it’s probably best to take a deeper look into who’s spending their millions of dollars of marketing money convincing you that “buy and hold” is the best idea and why.

“Buy and Hold” Promoters

“Buy and hold” promoters vary but I’m going to single out the mutual fund( http://www.stockrhythms.com/investing-in-mutual-funds.htm ) companies at this point since they seem to have the deepest advertising pockets and are highly visible in their promotion of “buy and hold”.

Mutual funds have a strong vested interest in having you buy into the “buy and hold” mentality since their entire business model depends upon the average investor keeping their money parked…through good times and bad.

Remember, the mutual fund companies are earning a profit from your investment even while you are accepting losses!

So “buy and hold” is really the greatest investment strategy available, it’s just a matter of perspective. If you like that your mutual fund company profits while the Bear Market ravages your account value, then “buy and hold” is for you!

So let’s look at some data to see how this really works.

“Buy and Hold” Facts

Between 1929 and 2002, there have been 14 Bear Markets with an average of 39% slashed off the value of stocks. During this 74 year period, it took an average of 3.5 years to return to breakeven!

Every time a “buy and hold” investor loses money in a down market, they lose invaluable time to reaching their financial goal. After eliminating overlapping Bear Markets, 41 years were spent suffering through a Bear Market or returning to break even.

In other words, “buy and hold” investors spend 2/3 of their time just to break even!

“Buy and Hold” Myths

My favorite myth or scare tactic used by investment gurus is; “buy and hold” investing is critical since you cannot afford to miss the bull run when it hits. And they go on to cite what happens to those that miss the “big days”.

Ah…good point, what does happen? If you would have invested $100 in 1926 and just left it there until 1993, your investment would have climbed to $80,000. Conversely, if you had tried to time the market and missed the 30 best months, your investment would have only been worth $1,200.

“Buy and Hold” Does Work Better?

So I’ve just convinced you that “buy and hold” does work better right? But what would have happened if you used market timing and missed the 30 best months and missed the 30 worst months? Your investment would now be worth $120,000 or 50% more than simple “buy and hold”.

Not to get too carried away but if you had avoided the 30 worst months and still managed to hit the 30 best months, your investment would have increased to an astronomical $8,600,000. Now I’m not going to try to convince you that market timing is going to hit every winner and miss every loser but I also don’t think it’s fair for the “buy and hold” advocates to represent only one side of the equation to their benefit either.

“Buy and hold” is a guaranteed method of losing money during every Bear Market. Give yourself a fighting chance by looking at a better way to invest.

“Buy and Hold” Replacement

So how do you avoid losing money every Bear Market with “buy and hold”? The simple answer is “get out of the stock market when it’s the Bears turn”. Of course, that’s usually harder to do than to say.

This is where we can help you to become a better stock market investor. Not only are we going to show you how to avoid the Bear Market losses, we’re going to show you how to profit from the Bull Market and then turn around and profit from the Bear Market.

And I’m not talking about extreme market timing, I’m talking about a conservative, time tested investment process.

A Better Investment Plan

There is a better way to position yourself for a higher probability of investment profits than extreme market timing( http://www.stockrhythms.com/market-timing.htm )or passive “buy and hold”. One that has been tested and proven with over 74 Years of Stock Market Research! Our proprietary Olympic Ring( http://www.stockrhythms.com/how_it_works.htm ) investment system has been issuing profitable trading signals, trade after trade, year after year, and we can start doing it for you too!

Maximize your returns while lowering your overall risk through the use of a highly scientific and emotion free system. And unlike the “buy and hold” investment plan, you’ll be positioned to profit from the Bear Market and the Bull Market. Nowwon’t that be a change!

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Stock Market Investment

Going in literal terms, a stock market is a place for the trading of derivatives and company stocks, listed on stock exchange. The stock comprises of shares, commodities and so. As earlier said, ‘a risk cell’, this market is full of uncertainties and risks. Risks, to loose the hard earned money. Every investor invests in stock market with a perspective and motive to earn positive better results. The bulls and bears are the situations with which you may make some or loose some. The uprising in stocks is termed as bulls’ situation and vice versa.

As such, stock market investing is not a child’s play. The investing in stocks may be carried as a sideline business by an investor but the amount of knowledge needed to invest cannot be side lined. It demands a fearless, fiery and extensive knowledge to understand moods of the stocks. An intuitive person may succeed once but that does work for all time. All counts is the experience in this field along with the almighty luck. Yes, luck is also an important factor that moves on with an investor.

The stock market always has shocks and news in stock. No one can be sure about what’s next? The pressure of bulls and bears along with the fear of losing money and the predications and tips by the companies always adds spice to the happening world of stock market. One has to be familiar with the dictionary of stock’s world. What I mean is- the stock market has its own words to represent the situations and products. Bulls and bears being the example, one has to work upon the dictionary used in this market. Intraday, future and options (f and o’s) are mere examples of these.

Being aware of the fact that it is a risky affair to invest, thousands of people invest daily in the stock market. To provide assistance there are brokers available who try to get the best possible deal. Brokers are the people who work on percentage basis to fetch the best deal. Very often, the commission is calculated on the money invested. This commission, in turn, is known as brokerage. This amount has to be paid by each investor who does not posses his own pass to trade directly in stock exchange.

Well, only one thing is certain and that is change. Changes are always certain, so does the experienced stock world.. It has moved on to cyber space from the clattered, clumsy stock markets, which looks nonetheless fish markets. The evolution of Internet is the reason for the revolution in stock markets as well as other trading. It got the easy access feature along with the comfort of operating stocks from one’s office or home. The speedy technology acted as a catalyst to break the norms of stock market. It is no more an alien world for people. Rather, it got unearthed and the mysteriousness of this trading place just vanished. Now, people are comfortable trading online and the investors and their investments have increased three-fold. The bulls and bears are no more only confined to the creams rather it has skimmed to the commons.

Moreover, the technological support not only acted as middlemen rather it worked as a magnet which brought thousand of new faces to the stock market. The advances of online brokerages, online trading and online investing further jacked the boom in the stock market investment.

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Equity Market Investment Strategy

Before investing in equity market first we have to aware about Equity.

Definition of Equity: It is a stock in the ownership of a particular company. It is the difference between liabilities and assets. As you get more equity, your ownership stake in the company becomes greater. Equity, shares all means the same.

Being a Owner means holding a company’s equity that you are one of the many owners (shareholders) of a company and as an owner you are authorize to your share of the company’s earning and any voting rights attached to the equity.

A stock is represented by a stock certificate. This is a piece of paper that is a proof of your ownership. Now a day it is known as dematerialized form which means it is in electronic form shares have been kept safe. The purpose behind of doing this is to make the shares easier to trade. Before when a investor wants to sell shares, that person physically took the certificate down to the brokerage but now trading with a phone call or a click of the mouse makes life easier for every trader.

Let us know about Equity Finance: Issuing stock is called equity finance. Questions comes to the mind is Why company issue stock? The main reason is at some point every company needs to raise money. To do this either company borrow from somebody or raise it by selling part of the company, which is known as issuing stocks. Issuing stocks is the advantageous way for the company because it does not require pay back the money or make interest payments along the way. Selling of a first stock issued by the private company itself known as initial public offering(IPO). It is important to understand the difference between financing through debt and equity. When you buy a debt investment such as bond you are guaranteed the return of your money along with promised interest payments. This is not the case with equity investment.

Now important views on risk factors: The most focused point is that there are no guarantees when it comes to individual stocks. Yes this point sounds negative but there is also a bright side. Taking a greater risk demands a greater return on investment. This is the important reason why stocks have historically outperformed other than investment such as bonds or saving accounts. For the long term, investment in stocks has historically had an average return.

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Most native banks are humoring to require over the investment banking business, and a few extremely under-leveraged firms have gained plenty and showed most growth. These firms are currently more and more sound onto a replacement investment through equity offerings to subsidize growth plans.

Banks and their mode of operation

A majority of banks serves their customers within the most typical sector groups like Telecommunications, Media, Commodities, Healthcare, property and financial establishments. reckoning on the necessities of the consumer, the bank tender services, starting from Acquisitions to Equity and funding to share sales. a number of the Bankers get references from customers all the approach through their Capital Management Division. This division conjointly handles resources of execs like govt Officers and Business homeowners.

Major players within the Sector

The capital raising bankers fancy marketing securities with the intention of raising capital for businesses. On the buying-side, there are different Institutional patrons, non-public Equity Funds, and Hedge Funds. These are principally within the case of initial public share providing, as well as the community as a vital section. there’s associate involvement of brokers United Nations agency finance the general public shares to alleviate some threat. Another half is vie by rating agencies United Nations agency have an impression on the value of the securities oversubscribed.

Career Prospects at world Banks

In some regional banks, people are rarely paid on top of that of finance Bankers. Most qualified graduates struggle for employment, notably at world banks. a number of them follow their Management or controller credentials for a chance of associate interview. the standard chain of command at a Bank is businessperson – Associate – Manager – Director – Chief administrator. several graduates be a part of the bank and acquire promotion while not following any higher studies.

Understanding from the last crisis

Whether it is a short-run capital investment or long-run capital investment, there are 2 phenomena to grasp. the primary one is insignificant, and has less perform with basic realities. The second is investment minded, and joined to the rising of the capital in a very new perspective. There are investments that incorporate risk capital and long-standing portfolio investments. The flow of capital ought to be fully inspired, and also the starting of economically minded capital controls could be a smart initiative. associate integral a part of the International monetary coming up with ought to be in check of tentative cash in recreation of ever higher yields. The capital markets grant yields joined to financial condition and also the facet of things should be a minimum of defied.

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