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Computerized Investing > Second Quarter 2011

Value Averaging Spreadsheet

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by AAII Staff

While the goal of most investors is to “buy low and sell high,” some of us have the uncanny knack of doing just the opposite—buying at the very peak and selling at the very bottom. The market moves up and down, and very few investors have demonstrated the ability to consistently predict where it is headed over a long period of time. For someone looking to commit a large amount of money to the market, the specter of another market correction can be a disturbing thought. However, history has shown that sitting on the sidelines can be even more destructive, as we miss out on the superior long-term returns of the stock market.

One way to counteract the fluctuations of the market, thereby reducing timing risk, is to follow a “formula strategy” that “mechanically” guides your investing. Perhaps the best-known formula plan is dollar cost averaging, whereby you invest a fixed dollar amount in an asset at equal intervals over a long period. As a result, more shares of a stock or mutual fund are purchased when prices are relatively low, while fewer shares are purchased when prices are relatively high. Over time, this strategy can lead to a lower average per-share cost, which, in turn, increases the rate of return.

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