Two Ways to Buy the Same Market
Dollar-cost averaging (DCA) is the strategy most people learn first: invest a fixed dollar amount on a set schedule, regardless of price. Buy $500 of an index fund every month, no matter what the market is doing. It’s simple, automatable, and removes emotion from the decision. But it isn’t the only systematic approach, and it isn’t necessarily the most effective one.
Value averaging (VA), a method developed by Harvard economist Michael Edleson, flips the script. Instead of investing a fixed dollar amount, you set a target portfolio value for each period and invest whatever is needed to hit that target. If the market drops and your portfolio falls short of the target, you invest more that month. If the market rallies and you’re ahead of target, you invest less — or even sell the difference.
Why Value Averaging Can Outperform
The mechanism is straightforward: VA forces you to buy more shares when prices are low and fewer when prices are high, automatically and without guesswork. Say your target growth is $500/month. In a month the market drops 10%, your portfolio might be $450 short of target, so you invest $950 instead of $500 — buying far more shares at the discount. In a month the market jumps 10%, you might already be $400 over target, so you invest only $100, or nothing at all.
Backtests going back to the 1990s, including Edleson’s own research, generally show VA producing a few percentage points of extra return over DCA across volatile markets, because it systematically shifts more capital toward dips than a flat schedule ever could.
The Catch Nobody Mentions
Value averaging isn’t free of downsides. It requires recalculating your target and required contribution every period, which means either a spreadsheet or a brokerage that supports it — most don’t natively. It can also demand unpredictable cash outlays: a sharp downturn might ask you to invest three or four times your normal contribution in a single month, right when your instinct (and possibly your budget) says otherwise. If you don’t have that cash available, you simply can’t execute the strategy as designed, which defeats the purpose.
There’s also a tax wrinkle: the “sell when over target” version of VA can trigger capital gains in taxable accounts, something DCA never does since it only buys.
Which One Should You Actually Use
If you have irregular cash flow, a tight budget, or want true “set it and forget it” investing, DCA remains the more realistic choice — the extra return from VA means little if market drops force you to skip contributions when you can’t cover them. If you have a cash buffer set aside specifically for investing, are comfortable with a monthly calculation, and invest inside a tax-advantaged account like a 401(k) or IRA, value averaging is worth testing on a portion of your portfolio. A practical middle ground: run VA with a strict monthly contribution cap (say, 2x your normal amount) so a crash never demands more than you can actually afford to invest.
