Is the dollar value average investment strategy profitable?

By June 23, 2021Bitcoin Business
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Welcome to our article on the Dollar Value Average investment strategy. This is less well known than Dollar Cost Averaging, but it is considered the more efficient investment strategy in theory.

However, can Dollar Value Averaging actually generate higher returns? Well, we got to the bottom of this question, and the answer will definitely surprise one or the other!

Of course, in this article, I will explain to you in simple terms what exactly Dollar Value Averaging is, how it works and what are the pros and cons of this investment strategy. Do you want to protect yourself as an investor from making costly bad decisions? Then it is worthwhile for you to read this article carefully to the end.

Only beginners throw their money haphazardly into the market. That’s why we want to give you a method with Dollar Value Averaging as an investment strategy, which doesn’t get the attention it deserves in the mainstream.

Since this strategy comes from the traditional investor market, this method is suitable for any financial investment. Whether you want to invest in cryptocurrencies, stocks, forex, commodities, or anything else, you can apply the Dollar Value Average Investment strategy to all markets with ease.

What is Dollar Value Averaging?

Dollar Value Averaging is an investment strategy similar to the more widely used Dollar Cost Averaging, but at the same time, it differs in one major way. Just like Dollar Cost Averaging, the investment period is divided by you into clearly defined time intervals. However, with Value Averaging, the same amount of money is not always invested at the end of each interval.

With Dollar Value Averaging, you set a target growth rate or target amount for your asset base or portfolio each month. You adjust this amount each month according to the relative gain or shortfall on the original asset base. At this point, this may sound more complicated than it actually is. Therefore, let’s take a look together at how Dollar Value Averaging works.

How does the dollar value average strategy work?

As mentioned before, the investment period is divided by you into clearly defined time intervals, and after each interval, you reinvest a certain amount of money. You determine the time interval. For example, your deposits can be made every week or after every month. However, the amount of money you invest changes depending on the performance of your portfolio and the monthly growth rate you set for your portfolio beforehand. To explain in detail how Dollar Value Averaging works, let’s start with the following example.

A practical example of dollar value averaging:

Micha already holds $2,000 in BTC. He wants to invest a certain dollar value in Bitcoin to diversify his portfolio. Therefore, he specifies that his bitcoin portfolio should grow by 10% every month. Thus, his monthly growth rate is 10 percent. So after one month, he wants to own BTC worth $2,200, after two months worth $2,400, and so on. So the monthly growth rate always refers to the initial amount of $2,000. This means that he is willing to invest so much in Bitcoin each month that he reaches exactly the target amounts that he previously reached through the growth rate he chose for himself.

So for Micha, using Dollar Value Averaging, this means that he wants to reach a Bitcoin portfolio of $2,200 at the end of the first month. If we assume that the Bitcoin price has fallen by 5% over the course of the month, his BTC will only be worth $1,900 at the end of the month. This buzzer is derived from his initial amount of $2,000 minus the exchange rate loss ($2,000 x 5% = $100). This means for Micha that he has to add $300 at the end of the month to reach his target amount of $2,300.

Let’s now assume that over the course of the second month, the Bitcoin price increases by 5%. Micah’s BTC, which was worth $2,200 at the beginning of the month due to his renewed investment, has now risen to a value of $2,310 (= $2,200 + $2,200 x 5%). According to the Dollar Value Averaging strategy, he now only has to pay the difference between the current portfolio value and the target amount of $2,400 ($2,400 — $2,310 = $90).

So you see that with the Dollar Value Averaging strategy, the monthly investment amount must be constantly adjusted. So, in theory, when prices are high, less money is automatically bought, or even money is withdrawn from the portfolio, while when prices are falling, more money is invested. What advantages and disadvantages this investment strategy actually has, we want to look at later in more detail. But now, let’s first take a look at how the Dollar Value Averaging strategy would have actually performed for your investment in Bitcoin.

With Dollar Cost Averaging, we assumed that $100 should be invested in Bitcoin each month for 12 months. For the best comparison, with Dollar Value Averaging, we assume that our Bitcoin portfolio should increase by exactly $100 each month. So at the beginning of the first month, we want to hold BTC worth 100$. At the beginning of the second month, it should be BTC worth 200$, in the third month, BTC worth 300$ and so on.

What are the advantages and disadvantages of the Dollar Value Average investment strategy?

As with any investment strategy, Dollar Value Averaging as an investment strategy has circumstances that speak for and against its use. Below you will find a list of its main advantages and disadvantages, which can help you determine whether using this strategy is right for your project.

Advantages of Dollar Value Averaging:

  • Dollar Value Averaging is a good way to automatically buy more when prices fall and buy less when prices rise.
  • It provides you with an unambiguous guideline for your investment decision and saves you from being guided by emotions.
  • The Dollar Value Average strategy saves you in the long run from unfortunate market entries and the negative feelings that come with them.
  • Dollar Value Averaging has produced even higher returns in our field test than its alternative, Dollar Cost Averaging.

Disadvantages of the Dollar Value Average strategy:

Its application is more costly and complicated. Therefore, if you want to make yourself as comfortable as possible, you should use Dollar Cost Averaging.
Due to sharply falling prices, the shortfall can be so high that it may not be possible for investors to make up the shortfall in full. For dividend-bearing assets, the Dollar Value Average strategy faces additional opportunity costs.

Is dollar value averaging better than dollar-cost averaging?

When using the more widespread Dollar Cost Average strategy, investors make periodic investments always in the same amount. The current price does not matter. On the other hand, Dollar Value Averaging ensures that most of the investment has been made at lower prices over time. This results in a significantly higher return. Thus, Dollar Value Averaging is the more efficient method to achieve the highest possible return. However, the Dollar Cost Average strategy is much more passive and therefore easier to apply.

All risk reduction strategies also have their drawbacks. This is true for both cost and value averaging. For example, both have opportunity costs. Nevertheless, they are an efficient strategy for investors to achieve better returns at a lower risk, especially in volatile markets like the crypto market.

Is dollar value averaging and trading signals the right investment strategy for you?

To decide for yourself if the Dollar Value Average investment strategy is the right approach for you, ask yourself the following questions:

Do you want to invest rather than actively trade the market?
Is there high volatility in the market you want to invest in?
Are you unsure about the direction of the price shortly?
Do you tend to let emotions guide your buying decisions?
Do you want to get the highest possible return?

If you can answer all or at least most of these questions with a clear yes, then Dollar Value Averaging as an investment strategy is a right companion for you and your investment decisions.

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