12

A Final Word

The market is a risky place, especially for investors who follow the psychology of the market, jumping in and out at all the wrong times. The introductory material on market risk and return was geared to help you get a feel for the scope of this risk, and how risk and return relate to your investment plan. There appears to be a role for formula strategies to help guide investors through this rocky investment terrain.

We’ve concentrated on exploring two popular formula strategies: dollar cost averaging and value averaging. Both have a natural mathematical tendency to buy more shares when prices are low and to buy fewer (or sell) shares when prices are high. This reduces the average cost per share below the average share price and enhances rates of return. The inherent return advantage of value averaging does not make it a better investment strategy for everyone. It is a bit more complex and has implicit costs for some investors. We’ve seen how flexible the strategies can be, and how you might use them to achieve a target investment goal over a specific period of time.

A few final points need to be made about “mechanical” investment strategies, such as dollar cost averaging and value averaging. Neither one will turn a sow’s ear into a silk purse; accumulating a bad investment, no matter the strategy, will result in bad investment returns. Neither of these methods, nor any other formula strategies, nor other “rules” programs will turn stock market investing into a “positive net present value” game, except perhaps as mentioned in the last sections of Chapter 9. Nonetheless, millions of investors subscribe to dollar cost averaging because of its cost reduction and return enhancement characteristics. Now you have shared in analyzing a reasonable alternative to the DCA strategy that may work for you. You certainly won’t get rich quick. But it’s about as close to “buy low, sell high” as we’re going to get without a crystal ball.