DCA and DVA Make Investing Simple

Author: Jim Pretin

| Posted: 12-06-2008 | Comments: 0 | Views: 7 | Rating: (51)

(?)

Ideally, investors try to buy a stock when the price has reached a support level (a level at which the price is as low as it will go) and sell the stock when it hits a resistance level (a level at which the price is as high as it will go). This is easier said than done. Most investors end up missing out on a continual rise by waiting for a stock to plummet first, or sell way to early by underestimating how high the price will go. In this article, we will focus on the two most popular strategies that you can use to invest without having to worry about market timing.

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares of stock are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns overall, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low.

An example of DCA would be as follows: If I want to buy 1,200 shares of IBM stock using DCA, then I might decide to purchase 400 shares of IBM per month over the course of the next three months. Hypothetically, during month one, the price of IBM may be $105 per share, and then it might drop to $95 per share during month two, and then rise to $100 during month three. If I bought all 1,200 shares during month one, I would have cost me $105 per share. But, by spreading the purchase over a three month period, I managed to buy IBM at an average price of $100 per share.

The primary drawback of using DCA is that you may not be maximizing your overall return. If there is an indication that a certain stock is currently undervalued and might shoot up in price, you would actually make less money using DCA than if you had bought all the shares in the beginning before the price skyrocketed. So, it is not always a winning strategy to spread your purchases over a period of time.

Value averaging, also known as dollar value averaging (DVA), is a technique of adding to an investment portfolio to provide greater return than similar methods such as dollar cost averaging and random investment. With the method, investors contribute to their portfolios in such a way that the portfolio balance increases by a set amount, regardless of market fluctuations. As a result, in periods of market declines, the investor contributes more money, while in periods of market climbs, the investor contributes less.

Here is an example of DVA: I want to invest in Yahoo using DVA. For the sake of argument, we will say that Yahoo is currently $10 per share. I determine that the value of the amount I am going to invest over the course of 1 year will rise, on average, $1,000 each quarter as I make additional investments.

If I use DVA, I invest $1,000 to start. If, at the end of the first quarter, the share price has risen to $15 per share, that means that the value of my investment is now $1,500, which means I will only have to invest $500 at the start of the second quarter in order to bring the total amount of my investment for the first and second quarter to $2,000. So, I am investing less as the stock price increases.

Dollar value averaging usually works better than cost averaging because value averaging results in less money being invested as the stock price goes up, whereas with cost averaging you continue to invest the same number of dollars regardless of the share price. But, neither of these strategies are necessarily full-proof. Make sure you know something about the company you are going to invest in before you go forward.

Rate this Article:

Current: 0 / 5 stars - 0 vote(s).

Article Tags: DCA, DVA, Dollar Cost Averaging, Dollar Value Averaging

Article Source: http://www.articlesbase.com/finance-articles/dca-and-dva-make-investing-simple-446772.html

Print article

Send to friend

Publish this Article

Author feedback

About the Author:

Jim Pretin is the owner of http://www.forms4free.com, a service that helps programmers make an HTML form

Submitting articles has become one of the most popular means of generating quality backlinks and targeted traffic to your website. Join us today - It's Free!

Article Comments

Add new Comment

Learn To Avoid Market Timing
By: Jim Pretin | 16/02/2007 | Non-Fiction

How I Reduce My Investment Risk
By: Jim Pretin | 09/03/2007 | Investing

Investment Strategies For The Novice Investor
By: Jim Pretin | 03/12/2007 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Avoid Market Timing By Using DCA And DVA
By: Jim Pretin | 23/12/2007 | Investing

How To Avoid The Perils Of Market Timing
By: Jim Pretin | 27/02/2008 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Investing Wisely With DCA and DVA
By: Jim Pretin | 24/03/2008 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Put Your Portfolio On Autopilot
By: Jim Pretin | 10/05/2008 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Using Automated Investment Strategies To Invest Wisely
By: Jim Pretin | 18/07/2008 | Finance
Free Finance articles for use on your Finance related website. Find articles of the subject of Finance

Got a Question? Ask.

Ask the community a question about this article:

Q&A Powered by:

Latest Finance Articles

Shopping For Auto Insurance
By: Brenda Williams | 07/10/2008
When you get your license for the first time before you begin driving you need to get car insurance as it's mandatory to have car insurance while driving. Car insurance can be rather expensive, especially for new drivers which is why you'll need to ensure that you're getting the best...

Taking 100% Responsibility - the Prerequisite for Creating Money & Marriage Success
By: Leslie Cunningham | 07/10/2008
It's a simple concept, to refrain from blaming and complaining, and yet it's a challenge to change a habit, especially one that everyone else has. Like sticking to your diet, when everyone else around you is enjoying chocolate cake. Keep reading and you'll find out how this relates to your marriage and finances. Then I'll share some action steps to help you become 100% responsible for your life.

Retirement Income Investing and Your Portfolio
By: Steve Selengut | 07/10/2008
Brokerage firm monthly statements are designed to promote either fear or greed, depending on the current market environment. Nowhere on your statement can you find numbers that report your net investment, your total working capital, or your true asset allocation. Current and projected income numbers are given little attention

Buy to Let Investors Get a Boost
By: Parmdeep Vadesha | 06/10/2008
Buy to let UK investors are in a prime position to take advantage of a new government plan to spur property market activity. The scheme aims to permit property buyers to buy properties worth up to

How to Buy a Repossessed Property for Below Market Value
By: Parmdeep Vadesha | 06/10/2008
Buying a repossessed property is what matters for investors who are keen on reaping high profits. But even with the advantages it poses, there are certain aspects you need to be aware of before you start on the task of acquiring your next property cheaply.

Brits Should Ensure They Have the Cheapest Energy Supplier
By: Abbi Rouse | 06/10/2008
With energy prices escalating steadily, consumers could knock considerable amounts off their utility bills by switching from their areas default supplier.

How to Analyze Commercial Properties
By: Lorenzo Hills | 06/10/2008
Financing commercial properties or income-producing real estate is not an exact science. It requires subjective analysis, experience, and an ability to be innovative and creative.

Is There Really Such a Thing as Free Student Credit Cards?
By: Sean Masterson | 06/10/2008
Looking for free student credit cards? Some insist they don't exist. Don't believe them. You can find them, you just need to know how to play the game...

More from Jim Pretin

Homeopathy Rising in Popularity In The United States
By: Jim Pretin | 29/08/2008 | Health
Homeopathy, which has been the treatment modality of choice in Europe and Asia for many years, is starting to become popular in the United States

Using The P/E And PEG Ratios To Evaluate Stocks
By: Jim Pretin | 28/08/2008 | Finance
The P/E and PEG ratios are helpful tools to determine whether the price of a stock is overvalued or undervalued

Simple Strategies For The Novice Investor
By: Jim Pretin | 22/08/2008 | Finance
If you are not a sage investor, using dollar cost or dollar value averaging can help you get started while minimizing your investment risk

The Trillion Dollar Currency Exchange Market
By: Jim Pretin | 21/08/2008 | Finance
The Currency Exchange Market, or FOREX, has become the world's largest and most dynmaic exchange, with trillions of dollars trading hands on a daily basis

Why Is It Important To Have Umbrella Insurance?
By: Jim Pretin | 19/08/2008 | Finance
Umbrella insurance is perhaps the most important form of insurance protection, because it protects your assets in the event of a homeowners or auto related liability claim

The Rise Of Hompeopathy Over Conventional Medicine
By: Jim Pretin | 08/08/2008 | Health
For non-acute illnesses, many consumers in the U.S. are turning to homeopathic remedies in lieu of conventional pharmaceutical products

The Burgeoning Foreign Currency Exchange Market
By: Jim Pretin | 04/08/2008 | Finance
The foreign currency exchange market, known as the FOREX, has grown into the largest exchange in the world, with trillions of dollars being exchanged daily

Using Automated Investment Strategies To Invest Wisely
By: Jim Pretin | 18/07/2008 | Finance
If you are a novice investor and you can not decide when it is the right time to buy or cell a certain stock, talk to your broker about automated investment strategies like DCA and DVA

Article Categories

Article Marketing

Article Notepad

Stop Duplicate Content

Term Papers

Need Help?

Sign up for our email newsletter

Receive updates, enter your email below

Use of this web site constitutes acceptance of the Terms Of Use and Privacy Policy | User published content is licensed under a Creative Commons License.
Copyright © 2005-2008 Free Articles by ArticlesBase.com, All rights reserved. (0.36, 16)

DCA and DVA Make Investing Simple

Article Comments

Related Articles

Got a Question? Ask.

Latest Finance Articles

More from Jim Pretin

Need Help?

Site Links

Webmasters

Business Info

Sign up for our email newsletter