Tuesday, February 12, 2013

Value Averaging Strategy of Stock Investing


When I started investing with stocks years ago, one of the investing techniques that I applied with my stocks investing is the Peso Cost Averaging strategy. With this method, I selected fundamentally sound stocks and set aside money in equal amounts to buy more shares every month whether the market trend is going high or low. On the other hand, I also applied Technical Analysis method to buy and sell other stock shares whenever I see it going in my favor.

Both strategies gave me good returns on my investments. However, I’ve noticed that the Technical Analysis method eats more of my time analyzing the market trend aside from the tension that I feel inside me every time I miscalculated a trend and suffer brief losses.

Although the benefits of Peso Cost Averaging can be reaped on longer time frame, it gave me more comfort and stress-free atmosphere since buying shares for my portfolio is done on automatic mode unmindful of the direction of the market trend.

More than a year ago, I bumped into a book written by Dr. Michael E. Edleson entitled Value Averaging: The Safe and Easy Strategy for Higher Investment Returns.

I was fascinated by this investing strategy and the possible higher returns which resulted consistently based on the simulations that I’ve done prior to implementing its concept on my stocks investing. Since then, I shifted to this strategy from Peso Cost Averaging method while I still do occasional Random Investing technique using the different Technical Analysis concepts.

In the Philippines, Peso Cost Averaging method was widely publicized as one of the best method of stocks and equities investing most especially on long term horizons. However, the Value Averaging method have proven to be a better strategy in all type of market condition whether the market is rising, declining or fluctuating. However, it was not discussed as much as the Peso Cost Averaging.

Through PISO Ni Juan, I would like to share to you the good benefits of Value Averaging which may help you in your stocks investing success.



THE PESO VALUE AVERAGING STRATEGY

Value Averaging is an investment strategy researched and written about by then Harvard Professor Dr. Michael E. Edleson in his book Value Averaging: The Safe and Easy Strategy for Higher Investment Returns published by Wiley in the year 1988. This strategy supplements the traditional investment maxim of “buy low sell high” since you are required to buy relatively more shares when the market declines and to sell some of your shares when the value of your portfolio rises and exceeded the projected value.

In comparison with Peso Cost Averaging, Value Averaging has the following advantages;
  • Higher investment returns on any market condition.
  • Average cost per share is lower compared to Peso Cost Averaging.
  • Growth rate of portfolio is projected since the value of portfolio is predetermined in each future time period as part of this strategy while it is unknown for Peso Cost Averaging.
  • It is more ideal for retirement planning since the likelihood percentage of achieving your target is higher compared to Peso Cost Averaging.
  • Follow the investment axiom of “buy low sell high” where it buys more shares when the market is declining and sell some or part of shares when the share prices exceeded the target value of the investment.



FORMULATE YOUR OWN PESO VALUE AVERAGING SPREADSHEET

To formulate your own PESO VALUE AVERAGING SPREADSHEET, you can do the following steps below using MS EXCEL or other spreadsheet software.

In this presentation, let’s take the historical share price of BPI common stock as our example. Let’s assume that you started Peso Value Averaging on your stocks investment starting January 2012.

STEP 1. Plot the date and the target monthly value of your investment.

Fig. 1
On a spreadsheet, plot the date and the desired value of your investment on the 1st and 2nd column respectively. In this example, let’s start the date in January 2012 until February 2013.

Let’s assume that your initial target value of investment is P5,000 and will grow uniformly every month by P5,000 so that on the following month your target value will be P10,000 and on the next will be P15,000 and so on.

Your spreadsheet should look like the table in Fig. 1


Peso Cost Averaging method requires us to invest a uniform amount monthly unmindful of the price per share of the stocks in the market. In Peso Value Averaging, we estimate the monthly growth of our investment by forecasting the total monthly value of our investment which is our Target Value. In our example, we want our forecasted growth to be P5,000 every month.



STEP 2. Put the current share price in the third column

Fig. 2
Create a third column where you put the monthly price per share for our stock. Based on the BPI common stock share for January 31, 2012 (visit http://www.pse.com.ph), closing price per share is 60.65. Put this value in the Share Price column.

Your spreadsheet should now look like the one in Fig. 2;



STEP 3. Complete the whole spreadsheet table using the following parameters.

  1.  4th Column - Shares Owned
  2.  5th Column is Present Value
  3.  6th Column is Amount To Invest This Month
  4.  7th Column is Shares To Buy This Month
  5.  8th Column is Total Shares After Purchase
  6.  9th Column is Total Investment Amount


Your Value Averaging Spreadsheet template should look like the table in Fig. 3 below;



Fig. 3. Value Averaging Spreadsheet template



STEP 4. Input the values in the table using the following formulas.

Date: Input the Current Month
Target Value: Input the Target Value with the uniform monthly increments
Share Price: Get the month-end share price of BPI common stock from http://www.pse.com.ph
Shares Owned = Total Shares After Purchase Last Month
Present Value = Share Price x Shares Owned
Amount To Invest This Month = Desired Monthly Value – Present Value of Investment
Shares To Buy This Month = Amount To Invest This Month / Share Price
Total Shares After Purchase = Shares Owned + Shares To Buy This Month
Total Invested Amount = Total Amount Invested Last Month + Amount Invested This Month


For January 2012, the following are the results of the Value Averaging Spreadsheet Table based on the mentioned formulas.

  1. Date = January 2012
  2. Target Value = P5,000
  3. Share Price = 60.65 per share, taking BPI common stock in the Philippine Stock Exchange as example for this spreadsheet.
  4. Shares Owned = 0 for this month since we don’t purchase any stocks yet
  5. Present Value  = 0
  6.  Amount To Invest This Month = P5,000 – 0 = P5,000.00
  7. Shares To Buy This Month = P5,000 / 60.65 = 82 shares
  8. Total Shares After Purchase = 0 + 82 = 82 shares
  9. Total Invested Amount = 0 + P5,000 = P5,000



For February 2012, following the same formula above, we get the following results.

  1. Date = February 2012
  2.  Target Value = P10,000
  3. Share Price = 66.70 per share, taking BPI common stock in the Philippine Stock Exchange as example for this spreadsheet.
  4. Shares Owned = 82 shares ( from Total Shares After Purchase Last Month)
  5. Present Value = 66.70 x 82 = P5,469.40
  6.  Amount To Invest This Month = P10,000 – P5,469.00 = P4,531.00
  7. Shares To Buy This Month = P4,531 / 66.70 = 68 shares
  8. Total Shares After Purchase = 82 + 68 = 150 shares
  9. Total Invested Amount= P5,000 + 4,531 = P9,531.00 


Continue to input all the needed data to complete your Value Averaging Spreadsheet until February 2013. You should come up with the same result as the VA Spreadsheet below.


Fig. 4. Value Averaging Spreadsheet



WHY VALUE AVERAGING REMAINS UNPOPULAR COMPARED TO PESO COST AVERAGING

Since the book Value Averaging: The Safe and Easy Strategy for Higher Investment Returns written by Dr. Michael E. Edleson was published 25 years ago, many investors still embraced and remained loyal with Cost Averaging even with the proven advantages of Value Averaging.

The reason that I presume is that Peso Cost Averaging is simpler compared to Value Averaging method. With a uniform amount every month, investing can be done automatically with Peso Cost Averaging while Value Averaging requires some calculations for the required investment amount every month which is not fascinating with most investors.

However, for smart and confident investors who pursuit higher returns yet lower risk exposure during market decline, I recommend Peso Value Averaging as a better strategy for long term investments or even well suited with your retirement planning as well.