Volume 6 Issue 2007

You’re familiar with dollar-cost averaging — regularly investing the same amount of money, no matter what the markets are doing. Your money buys more shares when prices are low and fewer shares when prices are high. Over time, your per-share cost may be lower than the average per-share price.

Value averaging is similar to dollar-cost averaging. You still make regular contributions, but with value averaging, you set a monthly “growth target” for your account. Then, each month, you adjust your contribution amount, depending on whether your account exceeded or fell below the target you chose.

Participants in 401(k) plans may be able to take advantage of “401(k) value averaging.” Instead of increasing or decreasing plan contributions, however, account holders move money between equity and fixed-income investments to achieve their growth target.

Investing regular amounts steadily over time may lower your average per-share cost, but this investment method will not guarantee a profit or protect you from a loss in declining markets. Effectiveness requires continuous investment, regardless of fluctuating prices. You should consider your ability to continue buying through periods of low prices.