For you, the "Rules of Thumb" are Useless.
If you're not 100% confident about reaching your savings goals, you have a lot of company. I think a big part of the problem is the silly advice given out by so many "experts." Many of these "rules of thumb" will sound familiar to you:
- Save 10% (or 15%, or 20%) of your gross income.
- Set the percentage of stocks in your portfolio to 100 minus your age.
- (Your Age) X (Your Income/10) = Your Ideal Net Worth.
- Just keep buying the S&P 500, and hold it forever.
- A house is always a safe investment. Paying rent is throwing money away.
- Strive to have zero debt.
- Always carry a mortgage.
- Save (don't spend) your raise.
How good is this type of advice? It's terrible! You know it's terrible. That's why following this type of advice does not reduce your financial worries. The main problem is that these rules are not customized to fit your unique situation.
The two most important factors affecting investment strategy are:
- How much do you have?
- How much do you need to realize your dreams?
The answers to these questions should be the basis of your financial planning. ValueAverager has a single-minded focus on getting you from here to there. We do this by helping you implement the Value Averaging investment strategy.
Value Averaging was developed by Michael Edleson and described in his book. It is a strategy with a lot of merit, but it is too complicated for most investors to do on their own.
Value Averaging - Briefly
With Value Averaging, a Value Path is created that specifies exactly how much your portfolio should be worth at every period between your start date and the date you will reach your goal. Each period, you invest the amount of money that is necessary to get your portfolio back to the specified total value for that date. As each period goes by, you get closer to your goal, no matter how your investments are doing.
Example - College Fund
Here is an example Value Path for an investor who wants to plan for his eight-year-old son's college education. He would like to have $100,000 in the fund in ten years' time. In order to execute this plan, the investor needs to contribute about $339.95, per month*. However, the amount the investor contributes in any given month depends on how the portfolio did. If it went up substantially, he may not need to contribute (or he might even sell shares to get back on the Value Path). If it went down, then he will need to contribute more.
Since Value Averaging causes you to invest more money when share prices have dropped, and less money when prices have risen, you will get a higher overall rate of return. Edleson provides extensive documentation of this boost in returns in his book.
If you're new to Value Averaging, this probably sounds complicated. ValueAverager will make it simple. You will plug in your current investments and your goals and the website will do the rest. It will tell you where you are on the Value Path and when to buy and when to sell.
Each Value Path is a concrete plan that is tailored specifically for your situation and your goals.
Check back here for more details about ValueAverager, coming soon!
* This Value Path was created with the following assumptions: Yearly rate of return is 12.68%. Inflation is .5% per month. The $339.95 monthly contribution gets indexed to the inflation rate, meaning that the nominal amount contributed goes up gradually over time. When ValueAverager goes live, it will allow you to control all of these assumptions.
