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Performance Analysis of Dollar Value Averaging & Creation of a Practical Implementation Plan In Today's Financial Markets (Including a Comparison to Dollar Cost Averaging & Asset Allocation)

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This document is my doctoral dissertation that ultimately led to my book, GROWTH & INCOME: How To Build A Mutual Fund Money Machine. This dissertation documents my research in comparing the performance of dollar value averaging, dollar cost averaging, and asset allocation applied to mutual funds on historical performance of market indices including the S&P500, Dow Jones Industrial Average, and others. The research focused independently on the impact of key implementation details such as frequency of adjustment, volatility of the market index, investment size, market trends, etc. Detailed graphs for each factor considered are included. 

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Summary Table of Contents Page # 1

Abstract of Dissertation

            The research effort described in this dissertation is conducted to investigate the performance of an “automatic” investment technique known as dollar value averaging relative to the performance of dollar cost averaging and asset allocation.  Dollar value averaging has not been widely published and few practical implementation issues have been discussed in the literature.  Therefore, this dissertation addresses the following questions:

  When is dollar value averaging superior to dollar cost averaging and asset allocation?

  How significant is this superior performance?

  How can the small investor best implement dollar value averaging using real world investments?


A desired by-product of this effort is the creation of a step-by-step plan to use dollar value averaging on real investments.  This plan includes guidelines to maximize dollar value averaging performance and minimize the impacts of real world constraints or limitations such as commissions, taxes, and minimum investment amounts.


          The research effort is conducted in three phases.  The first phase or method is a literature search.  The literature search included book and periodical searches using on-line, multi-library index systems as well as printed indexes over the last ten years.  A thorough search was also conducted over the Internet using the “alta vista” spider indexing system.  The second phase of research is a mathematical derivation of the equations defining the performance criteria used in this effort for dollar value averaging and dollar cost averaging.  These derivations are performed to prove mathematically one of the hypotheses of the proposal (i.e., dollar value averaging and dollar cost averaging are equivalent in a perfectly flat market) and to predict the performance of pure dollar value averaging and dollar cost averaging relative to long-term trends versus short-term volatility of the market.  Mathematical derivations for asset allocation were not conducted.  The third phase of research consists of empirical simulations of dollar value averaging, dollar cost averaging, and asset allocation over periods up to thirty years.  The simulations are facilitated through the creation of a large spreadsheet that simultaneously calculates each technique’s actual results and differential results between the techniques for a given market.


          Published literature for value averaging is very limited, and except for the book, Value Averaging:  The Safe and Easy Strategy for Higher Investment Returns, by Michael E. Edleson (the founder of value averaging), none of it goes very deep.  Most of the literature simply defines value averaging and states that it is better than dollar cost averaging.  Only Edleson goes into the circumstances of when value averaging is better and provides some detail on how to invest using value averaging. 


                   The general conclusions regarding base rates and volatility are listed below:

  Dollar value averaging is best in up markets, but it swings more violently (and inversely) with volatility.

  Increasing volatility magnitude and frequency have slightly positive lasting effect on all three techniques.

  In flat markets, asset allocation performs better than dollar cost averaging which performs better than dollar value averaging, but the margin between the techniques is small.

  In down markets, dollar value averaging is the worst, but the situation quickly reverses on an uptrend.

  Dollar value averaging performs best, from a return on investment perspective, in bursty and uptrending markets.

  Dollar cost averaging has no tax consequences (ignoring dividends and capital gains and losses for trades made within the investment vehicle [e.g., a mutual fund]).

  Dollar value averaging suffers heavily when taxed, but it is still the best technique when it is best in the absence of taxes.


          Real world constraints that had significant effects on dollar value averaging returns on investment are summarized below:

  Generally, no-load, or no-expense, investing is best.  However, it is better to have one-time commissions, either upon investment or redemption or both, than to have on-going expenses (e.g., storage fees for metal accumulation accounts) based on the value of the account.

  The impact of taxes range from no effect on dollar cost averaging to dramatic negative impacts on dollar value averaging.

• The use of growth factors results in dramatically higher account values with little cost in return on investment.

  More frequent adjustment tends to be better unless a predominantly flat market occurs.

  Reinvesting dividends tremendously boost returns.

  Generally, insufficient money to invest in down markets is good with little degradation in return on investment on upswings and high resistance to poor returns on investment on down swings.


          Real world constraints investigated that resulted in little or no significance to the return on investment for dollar value averaging are presented below:

  Initial investment amount

  Minimum additional investment or redemption amounts

  Threshold of adjustment

  Maximum number of exchanges per year

  Size of monthly investments

  Timeliness (NOTE:  This test has biases as discussed in the body of the dissertation).


          Overall, the results of this research are consistent with publications by others. Most notably, this research confirms Mr. Edlesons’ claims that “no one strategy is strictly better than all others,” and the investment vehicle and performance is more important than the mechanical rules of a strategy.  The research presented in this paper shows that of the three techniques (dollar value averaging, dollar cost averaging, and asset allocation), the best technique from a return on investment perspective depends on the trends of the market and none of the techniques will counteract the direction of the trend.

The comprehensive dissertation is well over 300 pages.
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DOCTORAL DISSERTATION Written by:  Dr. Bryan Stoker 

This Doctoral Dissertation  is provided online as a free reference. You can also download your own copy of the entire book today using the "Buy It or Get It Free" links above. 

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