Value Averaging E-Book

Michael E. Edleson

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Investment Classic Series
• Sprache: Englisch

Seitenzahl: 313

Veröffentlichungsjahr: 2011

Beschreibung

Michael Edleson first introduced his concept of value averaging to the world in an article written in 1988. He then wrote a book entitled Value Averaging in 1993, which has been nearly impossible to find--until now. With the reintroduction of Value Averaging, you now have access to a strategy that can help you accumulate wealth, increase your investment returns, and achieve your financial goals.

Leseprobe

Table of Contents

INTRODUCING WILEY INVESTMENT CLASSICS

Title Page

Copyright Page

Foreword

Preface to the 1993 Edition

Preface to the 2006 Edition

Introduction

Chapter 1 - Market Risk, Timing, and Formula Strategies

RISK AND MARKET RETURNS

MARKET TIMING AND FORMULA STRATEGIES

ENDNOTES

2006 NOTE

Chapter 2 - Dollar Cost Averaging Revisited

DOLLAR COST AVERAGING: AN EXAMPLE

SHORT-TERM PERFORMANCE

LONG-TERM PROBLEMS WITH DOLLAR COST AVERAGING

SUMMARY

ENDNOTES

Chapter 3 - Value Averaging

VALUE AVERAGING: AN INTRODUCTION

SHORT-TERM PERFORMANCE

LONG-TERM PERFORMANCE AND VALUE AVERAGING

SUMMARY

ENDNOTES

2006 NOTE

Chapter 4 - Investment Goals with Dollar Cost Averaging

BACKGROUND

READJUSTING THE INVESTMENT PLAN

GROWTH-ADJUSTED DOLLAR COST AVERAGING

SUMMARY

ENDNOTES

Chapter 5 - Establishing the Value Path

VALUE AVERAGING VALUE PATHS

SUMMARY

ENDNOTES

Chapter 6 - Avoiding Taxes and Transaction Costs

TAX CONSIDERATIONS WITH VALUE AVERAGING

REDUCING TRANSACTION COSTS

SUMMARY

ENDNOTES

Chapter 7 - Playing Simulation Games

WHY SIMULATIONS?

WHAT AND HOW?

CONSTRUCTING THE SIMULATION

ENDNOTES

2006 NOTE

ENDNOTES TO APPENDIX TO CHAPTER 7

2006 NOTE

Chapter 8 - Comparing the Strategies

FIVE-YEAR SIMULATION RESULTS

TWENTY-YEAR SIMULATION RESULTS

SUMMARY

ENDNOTES

Chapter 9 - Profiting from Overreaction

TIRING OF A RANDOM WALK

WHY DOES THIS MATTER?

ENDNOTES

2006 NOTE

Chapter 10 - Details: Getting Started

USING MUTUAL FUNDS

WORKING OUT THE DETAILS

2006 NOTE

NOTES FOR FINANCIAL PLANNERS

SUMMARY

ENDNOTES

2006 NOTE

Chapter 11 - Examples: Strategies at Work

THE GOAL AND INVESTMENT ENVIRONMENT

INVESTMENT RETURN & TAXES

IMPLEMENTING DOLLAR COST AVERAGING

IMPLEMENTING VALUE AVERAGING

SUMMARY

ENDNOTES

Chapter 12 - A Final Word

Index

INTRODUCING WILEY INVESTMENT CLASSICS

There are certain books that have redefined the way we see the worlds of finance and investing—books that deserve a place on every investor’s shelf. Wiley Investment Classics will introduce you to these memorable books, which are just as relevant and vital today as when they were first published. Open a Wiley Investment Classic and rediscover the proven strategies, market philosophies, and definitive techniques that continue to stand the test of time.

Copyright © 1993 by Michael E. Edleson. All rights reserved.

Foreword copyright © 2007 by John Wiley & Sons, Inc. All rights reserved.

Preface copyright © 2007 by Michael E. Edleson. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada Revised edition originally published in 1993 by International Publishing Corporation, Inc.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

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Library of Congress Cataloging-in-Publication Data

Edleson, Michael E.

Value averaging : the safe and easy strategy for higher investment returns / Michael E. Edleson ; foreword by William J. Bernstein. p. cm.

Includes bibliographical references and index.

ISBN-13: 978-0-470-04977-8 (paper)

1. Investments. 2. Rate of return. 3. Stocks—Rate of return. 4. Finance, Personal. I. Title.

HG4521.E37 2007

332.6—dc22

2006047512

Foreword

Since its first printing in 1991, the cachet of Value Averaging has steadily grown to cult-classic status. So reluctant are its readers to part with the two original editions that these humble volumes have turned out to be highly profitable investments in and of themselves. The closure of the book’s original producer, International Publishing Company, was followed by the exhaustion soon thereafter of the planet’s last remaining supplies at a redistributor in, of all places, Cave Junction, Oregon; prices for used copies thereupon sailed into territory more typically seen with F. Scott Fitzgerald first editions.

Why, for the past several years, have investors been willing to pay hundreds of dollars for one thin paperback? The reputation of an investment classic usually issues in no small part from its literary qualities: the velvety logic of Benjamin Graham’s The Intelligent Investor, the good humor and powerful exposition of Burton Malkiel’s A Random Walk Down Wall Street, the moral thunder of John Bogle’s Common Sense on Mutual Funds, or the narrative elegance of Edward Chancellor’s Devil Take the Hindmost. While Mike Edleson’s Value Averaging is nothing if not well written, it qualifies as essential investment reading for an entirely different reason. Simply put, Mike Edleson’s book is the single best guide on the mechanics of deploying a steady stream of cash into a portfolio. I’ll go one step further: It is the only book that fully describes how any investor, from the smallest 401 (k) participant to the largest pension fund manager, can fully harness this powerful discipline.

The power of the value averaging method derives from its marriage of two proven but heretofore separate techniques: dollar cost averaging and portfolio rebalancing. The mathematical imperative of dollar cost averaging, the time-honored purchase of equal, periodic amounts of stocks, forces investors to buy more shares of stock or mutual funds when prices are low than when they are high, increasing overall returns, on average. Rebalancing, on the other hand, is most often applied to mature portfolios and mandates the periodic adjustment of portfolio allocations back to a set policy, forcing a strong element of “buy-low/sell-high” discipline into an investor’s trading decision making.

Mike’s special genius lay in realizing that these two techniques could be combined in the accumulation phase of a portfolio; not only are more shares bought when prices are low and fewer shares when prices are high, as with dollar cost averaging, but more money is deployed into stocks when prices are low and less when prices are high, producing yet more salutary long-term results.

Any investor fortunate enough to have come across Value Averaging during the 1990s and absorb its message was amply rewarded; prices defied both logic and gravity as that fateful decade wore on, and the technique told its practitioners to invest progressively less money on high-priced equity. Then, as prices plunged between 2000 and 2002, the hoards of capital accumulated during the previous several years was used to purchase shares at bargain-basement prices.

No investment technique, of course, works 100 percent of the time. Regular portfolio rebalancing, for example, usually increases portfolio returns, but it does not always do so. When markets move strongly up or down for a long period of time, such as occurred during the 1990s in the United States (up) and in Japan (down), rebalancing can hurt portfolio returns by the continuous purchases of a falling asset or the continuous sales of a rising asset. The same is also true of value averaging into an asset class over a period of relatively few years in a generally rising market, in which case the investor would have been better off purchasing a single lump sum.

Most investors, of course, will be adding to their portfolios for many decades. Here, the risks of a “bad draw” are far less, but still not zero, and are mainly the result of misjudging the long-term market return, one of the technique’s central inputs. Grossly overestimating this value will result in the purchase of too much stock, possibly exceeding the saving capacity of the investor, whereas grossly underestimating this value will result in too little stock being purchased.

The past few decades have seen a tectonic shift in the retirement landscape, with the replacement of the traditional definedbenefit retirement plan with a slew of defined-contribution schemes, prime among which is the 401 (k) account. The net effect of this radical alteration of the retirement savings paradigm has been the conscription of tens of millions of employees into becoming their own unwilling portfolio managers—in essence, a vast and unprecedented experiment in social engineering. For the vast majority of participants, untrained in basic finance and provided with mediocre investment vehicles, it will end badly. The few who will do well will be those who have read and absorbed the messages of the volumes listed at the beginning of this foreword, and in the order listed. Value Averaging is, if you will, the essential chocolate-sauce-and-cherry topping on the parfait, providing, in normal circumstances, an additional reward in excess to that obtained by assembling a disciplined, low-cost, diversified portfolio.

An investment strategy is much like the blueprint for a skyscraper. It is one thing to understand how the steel and concrete elements are assembled, and it is quite another to be welding rivets on an exposed girder 60 stories above a city street. While Value Averaging is a necessary and essential element in the assembly of a sound portfolio, it is most certainly not sufficient. First, you must actually be able to save. Perhaps you can pick securities as well as Warren Buffett, but if you are unable to put away a substantial percentage of your income, you are doomed.

Second, and just as important, you must be able to execute. The discipline of value averaging mandates that when everyone around you has panicked, not only must you keep your head and continue to purchase stocks, you must do so in far larger amounts than in more normal times. This will be particularly true if you are well along in the process, as the large amount of stock assets already in your portfolio will leverage up the amount of necessary purchases in the event of a bear market. As the old cliché goes, no balls, no blue chips: Some will have the knowledge, but not all will have the moxie.

At the risk of overburdening the reader with too many metaphors, the investment process can be likened to a sporadic, interminable war against both the markets and the “enemy in the mirror”—one’s own emotions. While Dr. Edleson cannot supply you with the courage necessary to confront these frightful adversaries, he can at least provide you with the training, weapons, and body armor with which to do battle in the capital markets.

—William J. Bernstein

Preface to the 1993 Edition

This book evolved out of an article I wrote titled “Value Averaging: A New Approach to Accumulation,” published in the AAII Journal X, no. 7 (August 1988). That article introduced an effective formula investment strategy that was a bit more complex than dollar cost averaging (constant dollar investing) but provided higher returns and other potential advantages. Over time, over a thousand investors called or wrote me with several questions, comments, enhancements, or other ideas. So this book was written with investors in mind—investors who want a clean and easy system for accumulating and moving their wealth through time to achieve their financial goals. It’s not for investors who want to get rich quick; getting rich slow is a noble enough financial goal to achieve.

After trying the latest gimmicks and following the current gurus in a futile quest to outwit and beat the market, some investors are actually satisfied with a fair return for the risk taken with their investment dollar. And, as you’ll see in Chapter 1, the stock market really does provide a good return over time; there just doesn’t seem to be much guidance for the intelligent individual investor on how to achieve these reasonable investment goals effectively. In this book, I attempt to provide and analyze some reasonable and effective ways to build up wealth over time. As opposed to haphazardly jumping from one fad to another, I recommend some disciplined, systematic approaches that allow you to build wealth in a consistent manner and generate good returns without undue risk. Using a systematic approach that is mechanical and nearly automatic relieves the investor of any need for market-timing skills, stock-picking skills, and the emotional involvement in the market that so often turns would-be investors into speculators.

If this all sounds a bit boring, then so be it. Perhaps you will miss the excitement and peril of second-guessing every trade and timing decision you make. Or you might become bored with deciding what to do with the hundreds of dollars you save on newsletters and stock guides, or how to spend all the hours you’ll free up.

The book is designed to first give you an overview of the market and a few basic formula strategies for investing in it. Chapter 1 delves into stock market risk and return, so that you are familiar with the investment terrain. Chapters 2 and 3 (respectively) summarize dollar cost averaging and value averaging, two basic formula strategies. The remainder of the book is oriented toward helping you decide on and tailoring an investment strategy that meets your needs, so that you can easily map out and immediately start your investment plan. Chapters 4 and 5 provide the methods and give examples of how to set and adjust the amount you invest over time to achieve your investment goals. There are some new formulas and procedures in these chapters that will allow you to respond to inflation, market growth, and many of the uncertainties you will face as your goals and investment performance change over time. Chapter 6 analyzes several important enhancements to these formula strategies and discusses how to deal with taxes and other transaction costs.

Up to this point, all of the data analysis is based on more than six decades of actual historical market data. Chapter 7 introduces you to market simulations, used to “game” how a strategy might perform in a wide range of potential future markets. Chapter 8 uses both market simulations and historical data to compare the performance of the two formula strategies and their many variations. Chapter 9 focuses on the tendency for market price movements to overreact. This tendency provides an additional rationale for formula investing; it also highlights the role of formula strategies in taking advantage of excessive price movements, instead of letting them take advantage of you. Chapter 10 provides some usable guidelines and nitty-gritty details for investors and financial planners on how best to use the strategies to meet their individual needs. Chapter 11 follows an investor through a 10-year case study of investing with these two strategies. Real world problems like dealing with inflation, taxes, market surprises, and changing rates of return are examined in detail. Chapter 12 summarizes.

Value Averaging: The Safe and Easy Strategy for Higher Investment Returns provides enough complexity for those readers who really want to “dig into” the material; but most of the tough parts can be skimmed or skipped by casual readers without affecting their ability to construct a reasonable, workable investment strategy. A calculator (especially an inexpensive financial calculator) will come in handy in working through some of the material. And although a computer isn’t necessary, readers who have facility with spreadsheet software (e.g., Lotus 1-2-3, Quattro Pro, Excel, etc.) will probably want to experiment on their own with a few of the ideas and perhaps even customize their own plan on their computer. Appendixes following Chapters 4, 5, and 7 provide specific examples and instructions for using spreadsheets to help with your calculations.

The historical stock market data used in many of the analyses in this book are market index data from the University of Chicago’s Center for Research in Securities Prices (CRSP). The data used are composed of the daily or monthly return (coming from both dividends and price changes) on the combined listed stocks of the NYSE and AMEX markets, all weighted by their total value, or market capitalization. The monthly figures are end-of-month data from December 1925 to December 1991. The daily figures are from July 2, 1962, to December 31, 1991.

I would like to acknowledge the valued contributions of: Bruce Cohen, Barbara Craig, Jerry Edgerton, Carole Gould, Phil Hamilton, Ronald J. Liszkowski, Alicia Lowe, Vita Nelson, and Maria Scott. My apologies to others whom I should have included. I mention, also, Chris Edleson, because he likes to see his name in print. Special thanks are due to Larry Dillard and Manny Contreras, who provided valuable research assistance. Finally, I dedicate this book to Jan, who, for all of her support, has still not read the book.

Preface to the 2006 Edition

It’s been 16 years since I wrote the original Value Averaging (1991) and 14 years since the revised edition (1993) came out. The classic edition being republished is the 1993 edition. The intervening period has been anything but boring for investors. As the markets alternated between exciting and exasperating, fortunes were made and lost and made again.

As we roll the clock forward from the original book, let’s take a look at modern markets and value averaging to see whether the strategy is as strong today as it was then. First, let’s get a historical perspective by comparing the market of the past decade (1996-2005) to similar market action from 70 years earlier (1926-1935). While you probably weren’t around for that earlier period of our history, you’re likely aware of the market insanity of the 1920s and 1930s, with the speculative bubble of the Roaring Twenties, the Great Crash of 1929, the unprecedented drawdown of market wealth that occurred over the succeeding few years, and the Great Depression of the 1930s. In the graph in , this wild historical decade is contrasted to the current decade (since 1995), exactly 70 years apart, but scaled to the same starting point. It’s an interesting comparison, as the early gentle run-up, the spike skyward, the crash and near-immediate rebound, the more painful and extensive second crash, and the steady climb out of the gutter after about three years, bear an uncanny resemblance across 70 years of time.