Value Averaging vs DCA: Another Way to Invest on a Schedule

Value averaging vs DCA, with a worked crypto example: how VA sets a target value path, why its returns look higher than they are, and the cash reserve it needs.

What is value averaging?

Value averaging (VA) is a scheduled investing method in which the target is the value of your holding, not the amount you put in. The method comes from Michael Edleson, who in his 1991 treatment suggested monthly or quarterly steps. You decide in advance how much the holding should be worth after each period, say $250 more every month, and then invest whatever it takes to reach that target.

The rules are simple to state:

• Below target: buy enough to bring the holding up to the target value.
• Above target: in the classic version, sell the excess. In the no-sell variant, which Edleson later suggested as a way to reduce costs, you simply skip that period.

Compare that with dollar-cost averaging, where the amount is fixed and the value is whatever the market makes it. DCA automatically buys more coins when prices fall; VA goes further and invests more dollars too.

How to calculate each value averaging buy

Each period needs one line of math: VA buy = target value − (coins held × current price). A negative result is a sell signal in the classic version, or a skipped period in the no-sell version. The target path can rise by a fixed dollar amount, as in the example below, or by a percentage each period. Write the path down before you start, because changing targets midway turns the method back into guesswork.

A worked example: value averaging vs DCA on the same path

Suppose your target is for a hypothetical Coin B holding to grow by $250 a month, and the price moves through a dip and a rally over six months. The DCA investor puts in $250 every month regardless.

Month 2 shows the mechanism. The 12.5 coins bought in month 1 are now worth 12.5 × $16 = $200, which is $300 short of the $500 target, so VA invests $300. In month 5 the rally lifts the holding to $1,400, which is $150 above the $1,250 target, so the classic version sells $150.

After six months, the results compare like this:

Why value averaging’s returns look better than they are

At first glance, VA wins easily: 65.03% against 40.71%. Look at the profit row, though. All three approaches made roughly $600. VA’s percentage is higher mainly because it put less money to work, not because it made more money.

The fair comparison gives each method the same $1,500 budget and counts the unspent cash. The classic VA investor holds $1,500 of Coin B plus $591.07 never invested, $2,091.07 in total. The no-sell investor has $1,600 plus $512.50, or $2,112.50. The DCA investor has $2,110.71. Measured on the same budget, all three ended within $22 of each other.

This is the effect Simon Hayley of Cass Business School describes in a 2014 paper. Because VA invests more after poor returns and less after good ones, it mechanically raises the internal rate of return, but in his analysis it did not raise expected profits, and he concludes that VA is an inefficient strategy. The same trap appears whenever you compare money-weighted returns across plans that invest different amounts, as time-weighted vs money-weighted returns explains.

The cash reserve problem

VA’s contributions are unpredictable, and they grow exactly when markets feel worst. Edleson’s design assumes you keep a “side fund” of liquid assets to meet those calls.

Run the no-sell version through a steady decline, with Coin B at $20, $17, $14, $11, $9 and $8. The monthly buys become $250.00, $287.50, $338.24, $410.71, $431.82 and $388.89, for a total of $2,107.16, while DCA would have invested $1,500. VA needed 40.48% more cash, one month’s buy reached 1.73 times the base amount, and the holding was still only worth its $1,500 target at the end. That is a loss of $607.16, compared with DCA’s $485.46.

In crypto, where declines can be deep and long, a VA plan without a funded reserve tends to break at the worst moment. If you use one, decide in advance where the side fund sits and what happens when it runs out, for example by capping each buy at a fixed multiple of the base amount. A reserve held in stablecoins has its own risks, which stablecoin allocation covers.

Value averaging vs DCA at a glance

The selling feature deserves a second look. Trimming a holding that runs ahead of plan resembles portfolio rebalancing, and some investors value that discipline. But every sale adds fees and, in many countries, a taxable event. Rules vary by country; check with a qualified professional before using a strategy that sells regularly.

A decision checklist before choosing value averaging

VA only fits if you can answer yes to all of these:

1. You have a cash reserve, separate from emergency savings, that can cover buys well above your base amount for several months in a row.
2. You are willing to calculate and place a different order every period, because a standard fixed-amount recurring buy cannot follow a VA schedule.
3. You have decided whether you will sell above target, and you understand the fees and possible tax consequences.
4. You will judge the result by total dollars, including unspent cash, not by the percentage return.

If any answer is no, fixed-amount DCA delivers most of the same averaging effect with far less effort. You can model that fixed-amount baseline in the DCA calculator, and check your blended purchase price with the average cost basis method.

The bottom line

Value averaging invests to hit a target value path, buying more in dips and less, or even selling, in rallies. Its higher percentage returns mostly reflect investing less money, and on the same budget our example ended within $22 of plain DCA. The real costs are a cash reserve, more work each period and possible sales, so it only works for investors who can fund and follow those rules.

This content is for education only and is not financial, investment, tax or legal advice. Crypto assets are volatile and you can lose money. Examples use hypothetical numbers. See our disclaimer and editorial policy.