Value cost averaging is yet another way to invest your money on a periodic basis. The strategy is similar to dollar cost averaging in that you make regular investments regardless of the current price of a stock. Instead of investing the same amount of money each time, like dollar cost averaging, you add a fixed value to your investment each time. So if you chose a value of $1000, then you would purchase $1000 worth of stock initially. You would use your second investment to bring the value of that holding to $2000. The third would bring it to $3000, and so on.

As the price of your chosen stock ebbs and flows, you would be investing different amount of money and purchasing different amounts of stock with each investment. So if you bought 100 shares at $10 each in the first round, you’d need to see what that was worth before your second purchase. Let’s say that the stock was worth $10.50 at your next investment, meaning that your position was worth $1050. In that case you’d buy $950 worth (about 90 shares at $10.50) to bring your total holding to a value of $2000. If the stock was at $9 at your next investment, your 190 shares would be worth $1710, meaning that you’d have to invest $1290 (about 143 shares at $9) to get the value to the target of $3000.

The obvious downside of using value cost averaging is that you have two variables, namely the number of shares and the price you’ll pay for each periodic investment. This added uncertainty is balanced by the fact that the value of your investment will be growing at the rate you desire.

There’s a great post that includes some more information about value cost averaging, as well as a comparison of different investment strategies over at The Digerati Life. I saw that post a while back, but the transition to Wordpress and my other upgrades to the site have kept me so busy that I’m just now getting a chance to cover this topic.