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Mar 22 2013

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Unnerved By Surging Markets? Try Value Averaging


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With the U.S. market continuing to hit new highs, many investors are wondering whether it’s a case of too much too soon.

During the past 10 months, the S&P 500 has risen nearly 24 per cent, including dividends. Vanguard’s MSCI Canadian stock ETF hasn’t kept pace, but it’s up 14 per cent since June.

If fast market rises make you nervous, you might consider a “value averaging” investment strategy. It ensures that you invest more money when markets are in a funk and less when markets are rising. The strategy has a long track record of success, and has worked marvelously over the past five years with the Canadian, U.S., International, and Emerging Stock Market indexes.  

It doesn’t involve speculative decision-making either.

Please read the rest of my Globe and Mail article:

About the author

andrew hallam

I'm a freelance finance writer, lucky enough to have been nominated as a finalist for two Canadian National Publishing Awards. I'm also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, a book explaining how I became a millionaire on a teacher's salary, while still in my 30s. Working to empower people financially, I'm available to motivate and inspire people on basic retirement planning and index investing. I'm happy to comment on your questions, first, please read the Terms of Use.

Permanent link to this article: http://andrewhallam.com/2013/03/unnerved-by-surging-markets-try-value-averaging/

8 comments

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  1. avatar
    Value Indexer

    Although caution is warranted now, I wouldn’t be comfortable selling like this when I know I may well have to use that cash to buy back in next year at a higher price. Several stock markets have gotten less attractive recently but they still compare well to the alternatives. Regular rebalancing seems like more than enough since it’s focused only on the long term.

    Maybe I’m just an example of “common sense” suppressing better ideas.

  2. avatar
    Joe

    This feel like rebalancing to me.

    Currently if my stock indexes charge ahead I might sell them and transfer the money to the laggards (or at the very least put new money into the laggards).

    Value investing sounds like the same thing except I put the proceeds from selling my charging ahead stocks into a money market instead of a bond index, a REIT index or some other investment? Or am I misunderstanding? I’ll read the book.

    Seems like there could be the potential for cash to be sitting in the money market losing to inflation for a long time.

    Thanks for another good post Andrew.

  3. avatar
    Barry

    Thanks Andrew

    I’ve been reading some info on Valuation-Informed Indexing also

    Barry

  4. avatar
    Canadian Dividend Blogger

    I have been taking this approach over the last 3 or 4 months, ever since markets started rising. Although perhaps my approach is slightly modified, and could be more characterized by “letting my portfolio ride”. As long as it’s going up, and still fairly valued from a fundamental perspective, I see no reason to either add money to dollar cost average, or sell to maintain a specific value.

    1. avatar
      Andrew Hallam

      Canadian Dividend Blogger,

      I think the success of the approach comes from its almost mechanical objectivity. Have you read Edleson’s book or checked out the website I linked to in the article? I think you would find them both fascinating. If you decide to fully embrace the method after reading more about it, let me know.

      Cheers,

      Andrew

  5. avatar
    Agnes

    Hi Andrew,
    I am currently living in Singapore, in the early 20s. I have read your Millionaire Teacher book and have been inspired to purchase index funds (Spore stock index and government bond index as well as World Stock Index) via Vickers. However, looking at the performance of the index funds in STI etc, they have been on a high recently. I was wondering if I should go ahead and purchase the index funds right now. Could you kindly advise?
    Additionally, will like to ask, if we were to buy the 3 forms of index via Vickers, will the transaction cost be multiplied by 3 times with the 3 indexes?

    How often do you recommend one to put in fresh money to rebalance the portfolio with the high transaction fee of trading account?

    Thanks!

    1. avatar
      Andrew Hallam

      Hi Agnes,

      I’ll be publishing a post, later today, which will help to answer (in detail) your question about rising markets.

      If you buy an ETF via DBS Vickers, you will be charged per transaction. It makes sense to buy an ETF when you have a few thousand dollars to do so. E-Trade offers accounts for Singaporeans with lower trading costs, but they have higher currency exchange rates when purchasing foreign ETFs, so it’s a bit of a wash. If you want to be really thrifty, you could try using DBS Vickers to transfer money into U.S. dollars, then transfer the U.S. dollar funds to an e-Trade account, where you would only pay $9 USD per purchase commission, regardless of how much or how little you’re investing.

  6. avatar
    Andrew Hallam

    True enough Value Indexer!

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