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Value averaging (VA) is said to be outperforming dollar cost averaging (DCA) most of the time. But, as far as I know, most financial articles don't concern about the impact of back-end fee on VA strategy.

VA requires you to sell some of fund shares when the market value of portfolio exceeds the target value. The back-end fee has an impact on this point, the more you sell fund shares to adjust the portfolio, the more profit you will lost.

So, now this is the question: Which strategy, DCA & VA, is better in the long run when we concern about the back-end fee?

Thanks for the answers :)

rhaskett
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armamoyl
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2 Answers2

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Back end fees should not really matter much in DCA vs VA as they are both ways of deploying money in the markets and back end fees happen when selling not deploying. The only difference I can think of would be if the back end fees have a holding period and if you need to take the money out before that period end some money may be subject to a higher fee. The difference should not generally be large and since it is largely random whether DCA or VA deploys the capital more quickly it makes little difference.

On a related note, DCA or VA makes little difference and when transaction fees are significant or time frames are long (retirement) generally, on average, both lose to lump-sum investing.

Finally, as Chris mentioned mutual funds with load fees (especially back end but even front end) are considered poor investment choices as the vast majority don't give excess returns that justify the heavy fee load.

rhaskett
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Taking as given that your definition of VA involves selling at intermediate times, your question can be made more general. After all, value averaging is just one special case of a portfolio that rebalances to target weights periodically.

Do back-end fees (and front-end fees) harm the value of portfolios that require rebalancing? The answer is yes, they do. Those fees are put in place in order to prevent investors from redeeming shares over any but the longest horizons. Any portfolio that rebalances periodically will involve some periodic selling. If you invest in a fund with front-end or back-end fees, it is optimal to leave your money in it for as long as possible and not do any rebalancing.

If you want to run a portfolio that is at all active (involves rebalancing), then it is probably wise to use no-load funds. These are often some of the best and cheapest funds anyway, but even if front or back end load funds have a lower expense ratio, you will likely lose money on those loads as you rebalance.

farnsy
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