Value Averaging

<p>Foreword by William J. Bernstein ix</p>
<p>Preface to the 2006 Edition xiii</p>
<p>Preface to the 1993 Edition xix</p>
<p>Introduction 1</p>
<p>1 Market Risk, Timing, and Formula Strategies 3</p>
<p>RISK AND MARKET RETURNS 3</p>
<p>Market Returns over Time 3</p>
<p>Distribution of Market Returns 9</p>
<p>Risk and Expected Return 13</p>
<p>MARKET TIMING AND FORMULA STRATEGIES 20</p>
<p>Timing the Market 20</p>
<p>Automatic Timing with Formula Strategies 21</p>
<p>ENDNOTES 23</p>
<p>2006 NOTE 24</p>
<p>2 Dollar Cost Averaging Revisited 25</p>
<p>DOLLAR COST AVERAGING: AN EXAMPLE 26</p>
<p>SHORT–TERM PERFORMANCE 28</p>
<p>Over One–Year Periods 30</p>
<p>Over Five–Year Periods 32</p>
<p>LONG–TERM PROBLEMS WITH DOLLAR COST AVERAGING 34</p>
<p>Growth Equalization 35</p>
<p>SUMMARY 36</p>
<p>ENDNOTES 37</p>
<p>3 Value Averaging 39</p>
<p>VALUE AVERAGING: AN INTRODUCTION 39</p>
<p>SHORT–TERM PERFORMANCE 43</p>
<p>LONG–TERM PERFORMANCE AND VALUE AVERAGING 47</p>
<p>Linear, or Fixed–Dollar, Strategies 47</p>
<p>Adjusting Strategies for Growth 51</p>
<p>SUMMARY 53</p>
<p>ENDNOTES 54</p>
<p>2006 NOTES 55</p>
<p>4 Investment Goals with Dollar Cost Averaging 57</p>
<p>BACKGROUND 57</p>
<p>Lump–Sum Investments 57</p>
<p>Using the Formula 59</p>
<p>Annuities: Periodic Investments 60</p>
<p>Dollar Cost Averaging and Annuities 63</p>
<p>READJUSTING THE INVESTMENT PLAN 63</p>
<p>The Readjustment Process 64</p>
<p>Flexibility 66</p>
<p>Down–Shifting Investment Risk 69</p>
<p>GROWTH–ADJUSTED DOLLAR COST AVERAGING 71</p>
<p>Exact Formula 72</p>
<p>Approximate Formula 74</p>
<p>Readjusting the DCA Plan 75</p>
<p>SUMMARY 80</p>
<p>ENDNOTES 80</p>
<p>Appendix to Chapter 4: Constructing a DCA Readjustment Spreadsheet 83</p>
<p>5 Establishing the Value Path 87</p>
<p>VALUE AVERAGING VALUE PATHS 87</p>
<p>The Value Path Formula 88</p>
<p>Flexible Variations on the Value Path Formula 89</p>
<p>Readjusting the VA Plan 92</p>
<p>A Cautionary Note 93</p>
<p>An Alternate Method 93</p>
<p>SUMMARY 94</p>
<p>ENDNOTES 95</p>
<p>Appendix to Chapter 5: Constructing a VA</p>
<p>Readjustment Spreadsheet 97</p>
<p>6 Avoiding Taxes and Transaction Costs 101</p>
<p>TAX CONSIDERATIONS WITH VALUE AVERAGING 101</p>
<p>The Advantage of Deferred Gains 101</p>
<p>Deferring Capital Gains Taxes: An Example 102</p>
<p>A Compromise: No–Sell Value Averaging 107</p>
<p>REDUCING TRANSACTION COSTS 111</p>
<p>Limiting Taxes 111</p>
<p>Limiting Costs 112</p>
<p>SUMMARY 113</p>
<p>ENDNOTES 114</p>
<p>7 Playing Simulation Games 117</p>
<p>WHY SIMULATIONS? 117</p>
<p>WHAT AND HOW? 118</p>
<p>Parameters 118</p>
<p>Expected Return 119</p>
<p>Expected Variability 120</p>
<p>Randomness 120</p>
<p>CONSTRUCTING THE SIMULATION 121</p>
<p>An Example 122</p>
<p>ENDNOTES 126</p>
<p>Appendix to Chapter 7: Constructing a Simulation 129</p>
<p>2006 NOTE 131</p>
<p>ENDNOTES TO APPENDIX TO CHAPTER 7 133</p>
<p>2006 NOTE 134</p>
<p>8 Comparing the Strategies 135</p>
<p>FIVE–YEAR SIMULATION RESULTS 135</p>
<p>Using Growth Adjustments 139</p>
<p>No–Sell Variation 142</p>
<p>Volatility 143</p>
<p>TWENTY–YEAR SIMULATION RESULTS 145</p>
<p>SUMMARY 146</p>
<p>ENDNOTES 147</p>
<p>9 Profiting from Overreaction 149</p>
<p>TIRING OF A RANDOM WALK 149</p>
<p>Mean Reversion and Overreaction 150</p>
<p>A Brief Look at the Data 151</p>
<p>WHY DOES THIS MATTER? 160</p>
<p>Timing 161</p>
<p>ENDNOTES 164</p>
<p>2006 NOTE 167</p>
<p>10 Details: Getting Started 169</p>
<p>USING MUTUAL FUNDS 169</p>
<p>The Fund versus Stock Choice 169</p>
<p>Index Funds 171</p>
<p>Information on Specific Funds 172</p>
<p>WORKING OUT THE DETAILS 175</p>
<p>Using a Side Fund 176</p>
<p>Operating Within a Retirement Account 177</p>
<p>Establishing a Value Path 178</p>
<p>2006 NOTE 180</p>
<p>Setting Up a VA Value Path: An Example 181</p>
<p>Other Important Considerations 184</p>
<p>Using Guidelines and Limits 185</p>
<p>NOTES FOR FINANCIAL PLANNERS 186</p>
<p>Advanced Methods 187</p>
<p>SUMMARY 189</p>
<p>ENDNOTES 189</p>
<p>2006 NOTE 191</p>
<p>11 Examples: Strategies at Work 193</p>
<p>THE GOAL AND INVESTMENT ENVIRONMENT 194</p>
<p>Choosing an Investment 194</p>
<p>Setting the Goal (Dealing with Inflation) 197</p>
<p>How Much Should He Invest? 199</p>
<p>INVESTMENT RETURN &amp; TAXES 200</p>
<p>Expected Return 200</p>
<p>Taxes 200</p>
<p>IMPLEMENTING DOLLAR COST AVERAGING 202</p>
<p>1981: Setting Up DCA 203</p>
<p>1982 1983 Investment Results 205</p>
<p>1983: Reassessment and Readjustment 205</p>
<p>The 1985 Readjustment 211</p>
<p>And So On and So On . . . 212</p>
<p>Wrapping It Up: 1991 Results 214</p>
<p>IMPLEMENTING VALUE AVERAGING 215</p>
<p>Establishing the Value Path 215</p>
<p>1983: Readjusting the VA Plan 217</p>
<p>Future VA Readjustments 219</p>
<p>VA Investments 220</p>
<p>SUMMARY 225</p>
<p>KEY FORMULAS 226</p>
<p>ENDNOTES 227</p>
<p>12 A Final Word 229</p>
<p>Index 231</p>