Both dollar cost averaging (DCA) and value averaging are two popular investment strategies for profiting from the long-term performance of stocks or similar financial instruments. Both are good ways to systematically build an investment portfolio by adding capital to the existing portfolio on a monthly basis (or try monthly or annually).

Dollar cost averaging, also known as pound cost averaging and constant dollar plan, is a simple systematic investment method, in which the investor continually buys stocks, or units of mutual funds or other instruments, of a fixed amount. Therefore, the investment of the portfolio increases with a certain amount every month and the trader profits, buys and sells the instruments that he has at the desired time.

The basic idea of ​​dollar cost averaging is to benefit from the long-term returns of stocks and markets (around 11% per year for US markets), regardless of short-term market ups and downs. DCA investors easily ride through the ups and downs of the market. When the markets go down, investors can buy more shares/units for a certain amount and when the markets go up they can buy fewer shares/units for the same amount.

Value averaging is a more evolved investment strategy with a value added factor. Investors track the average purchase value of shares each month to reach a target portfolio value. For example, if the target portfolio growth rate is $500 per month and the investor buys $500 worth of stocks in the first month. In the second month, if the original value has increased from $500 to $600, invest less ($400) in the current month to achieve the portfolio value target of $1,000 for the second month. Probably, if the portfolio value has dropped from $1,000 to $900 in the third month, invest more ($600) to reach the portfolio value of $1,500 in the third month.

The advantages of dollar averaging cost are

(1) is independent of market times other than sales time,
(2) constant portfolio growth,
(3) minimum need for trade/investment experience and education, and
(4) best for people with stable monthly income.
But this strategy does not ensure good profits.

The advantages of averaging the value are

(1) generally better earnings than DCA,
(2) active management of portfolio investments, and
(3) best for people with investment experience,
(4) good when investors want short-term profit.

But the strategy can become difficult to follow in the long run. For example, the Portfolio Value Target mentioned above after 2 years will be $12,000. But due to an uptrend, it may decline to $8,000; then one should invest $4500 ($12,000 – $8000 + $500 monthly goal) for the next month. In the same way, there may be months in which investments are not needed.