Money Cost Averaging vs Value Averaging

This topic will be very useful for mutual fund investors.

Money-cost averaging is a strategy in which a person invests a fixed amount on a regular basis, normally monthly purchase of shares in a mutual fund. When the fund's price lowers, the investor receives slightly more shares for the fixed investment amount, and slightly fewer when the share price rises. It turns out that this strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down.

Value averaging on the other hand is a strategy in which a person adjusts the amount invested, up or down, to meet a prescribed target. An example should clarify: Suppose you are going to invest P10,000 per month in a mutual fund, and at the end of the first month, thanks to a decline in the fund's value, your P10,000 has shrunk to P8,000. Then you add in P12,000 the next month, bringing the value to P20,000 (2*P10,000). Similarly, if the fund is worth P22,000 at the end of the second month, you only put in P8,000 to bring it up to the P30,000 target. What happens is that compared to money cost averaging, you put in more when prices are down, and less when prices are up.

It is said in an article that it showed via computer simulation that value averaging would outperform money cost averaging about 95% of the time. "Outperform" is a rather vague. I wonder what they based that adjective on. From what I read, whatever the percentage gain of money cost averaging versus buying 100% initially, value averaging would produce another 2 percent or so.

Warning: Neither approach will bail you out of a declining market with all of your monies intact, nor get you fully invested in the earliest stage of a bull market.  Makes sense right?