Value Averaging - An Important Financial Planning Tool To Help With Your Personal Finances

How many of us really take an active interest in our portfolios? We tend to leave it to the fund manager in case we are into mutual funds and tend to put any spare cash in the latest fund that is "in" or as chosen by a "financial advisor", else we choose a "safe" inflation beating instrument. The more judicious amongst us squirrel away a little bit systematically while the experts are into looking for gains in the stock market.

But there are some easy to use tools out there which actually make our money work well with a little bit of attention. However, due to ignorance, overconfidence or maybe simple laziness we tend to ignore them. Value Averaging is one such tool. Its an unbelievably simple financial tool that anyone with even the most rudimentary knowledge about investments can use to good effect.

Simple Definition

In value averaging you put a certain amount of money into your investments so that the value of your investment remains the same.

Here's a way to make it work well and work with your portfolio.

Choose two asset classes - preferably diversified equity and a steady liquid asset. Lets say you have a portfolio of 100,000. You put 75000 into your equity portfolio and 25000 in the liquid asset. On a fixed date every month (or quarter) review the portfolio. If say your equity portfolio has gone up by $3000, book that profit and shift the monet to your liquid portfolio. And if the equity portfolio has fallen, shift money from the liquid asset into equity, so that the value of your equity portfolio remains constant either way.

Advantages

The advantages are obvious. You have kept booking profits and shifted it to a safe investment at every opportunity and at every rise. Also you have invested in equity when at low, unlike rupee cost averaging where you blindly put in a fixed amount into equity every month, whether high or low.

The trick in value cost averaging is to maintain discipline over a longish period. Its truly a golden way to beat the bears.

After all, you spend so much time earning, shouldn't you spend a little time to make your hard earned money work best...its not really rocket science.