Friday, December 26, 2014

[Book Review] Value Averaging by Michael E. Edleson



So I have actually read this book several months ago, but I've been just haven't gone about to blog about it because I think that probably a lot of people will think it's lame. Plus, DCA die-hard fanboys will have their entire meaning in life crushed by this book.

There are tons of investment books out there that tell us what to invest our money in. This book does not do that. It doesn't tell you to buy dividend stocks, ETFs or any asset allocation strategy. It simply does not care what you invest in.

This book tells you HOW to strategically invest your capital to accumulate wealth in the long-run. Dollar-cost averaging (DCA) is systematically torn down and killed by the value averaging (VA) strategy. While dollar cost averaging is far more simple and easy to execute, pimping your strategy using value averaging has proven that it outperforms DCA. Think of VA as the DCA+ version.

It is a beautiful strategy, especially if you appreciate the mathematics behind it. Buy more when "it" is cheap, buy less when "it" is expensive. The beauty of this strategy is that it works for any investment. As long as you can hazard a reasonable guess for long term returns, this strategy works.

Of course, there are no pros without any cons. The cons of this strategy is that you have to really understand the theory of it pretty well. The theory isn't really that complicated, but explaining it to someone that has never heard it before is not an easy task at all. This strategy also requires periodic reviews and it is very manual process. Those put off by some basic and menial number crunching and data entry on a periodic basis will not like this strategy at all.

On the flip side, is having a 30-minute monthly review to make sure that your finances and retirement is in order too much to ask? I think taking stock monthly is a fantastic way to remind yourself that you are in charge of your own financial future and encourage you to be a responsible adult.

That said, the past track record of VA is undeniably better than DCA or any other accumulation strategy. Buying low and selling high is age-old, time-tested investing wisdom that this strategy utilizes to beat the rest. Without a doubt, anyone who recommends DCA without at least acknowledging VA as an alternative strategy is living in the stone age of investing. VA has better returns, it is just more complicated to put in practice.

Strongly recommended for people that think DCA is a magical investing buzzword that improves your returns. After reading this book, you wouldn't even dare to suggest DCA without mentioning VA because your conscious will know that DCA is an inferior strategy. Anyone in the stage of accumulating wealth would benefit from this book.

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