How to Make the Most of Your Investments with Value Averaging – And When to Book Profits
Simple Personal Finance Tools
There are some easy to use personal finance tools out there which actually make our money work well. All it needs is some modest financial planning and a small investment of time. However, due to lack of time or other predominant work, we tend to ignore them. Value Averaging is one such simple financial planning tool. One needs just the most rudimentary knowledge about investments to use it to good effect. It can even be put ion auto mode to work with one’s investments. SIPs tell us when to invest the money and maintain discipline in investing. Its doesn’t tell us when or how to redeem (or sell) our investments. Value averaging, importantly, tells us how and when to sell.
Definition of Value Averaging
In value averaging one puts/withdraws a certain amount of money into/from investments so that the value of the investment remains the same.
Here’s a way to make it work well and work with one’s portfolio.
Choose two asset classes – preferably diversified equity and a steady liquid asset. Lets say one has a portfolio of Rs 100,000. You put 75000 into the equity portfolio and 25000 in the liquid asset. On a fixed date every month (or quarter) review the portfolio. If say the equity portfolio has gone up by Rs 3000, book that profit and shift the money to the liquid, low risk portfolio. And if the equity portfolio has fallen, shift money from the liquid asset into equity, so that the value of the equity portfolio remains constant either way. It is that simple. One can also put small targets, like say 20% rise in portfolio value, after which value averaging principles can be applied.
Advantages of Value Averaging
The advantages are obvious. One has kept booking profits and shifted it to a safe investment at every opportunity and rise in equity markets. Also one has invested in equity when cost is lower. This is unlike rupee cost averaging (or SIPs) where one blindly puts 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. In the recent Bullish market, every retail investor is facing the question – to sell or not to sell. Value Averaging could well be the answer.
Rehashing some basic investment fundas.
How many really take an active interest in managing their portfolios? People tend to leave it to the fund manager to manage their money in case of mutual funds. Investors tend to put any spare cash in the latest fund that is “in” or as chosen by a an “adviser”. Else they choose a “safe” inflation beating instrument. The more judicious squirrel away a little bit systematically in “safe investments”. Many do a bit of active portfolio management without any plan. The experts generally look for gains in the stock market. Then there are SIPs, the current favourite of the salaried class.
After all, shouldn’t you spend a little time to make your hard earned money work best? It’s not really rocket science.