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 :)

  • It would depend on the size of the investment and the size of the fee, surely? Apr 8 '16 at 17:26
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    Don't buy funds with back-end fees. Or front-end fees either, for that matter. Apr 8 '16 at 17:54

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.

  • But I think that VA isn't only 'deploying' but also 'selling'. If the market value of the portfolio exceeds the target value, we have to sell some of the fund shares to adjust the port so if the fund has a back-end fee, we'll also lost for the fee. So should we concern about that issue?
    – armamoyl
    Apr 9 '16 at 1:18
  • Maybe it is worth adding a description or link for what you are discussing to the question. Here is a standard description of Value Averaging and DCA neither of which should involve selling: investopedia.com/articles/stocks/07/dcavsva.asp Any strategy involving selling during the holding period would almost certainly be a very bad idea when combined with back end fees.
    – rhaskett
    Apr 9 '16 at 1:46
  • The article in your given link said that "Additionally, in certain circumstances, such as a sudden gain in the market value of your stock or fund, value averaging could even require you to sell some shares without buying any (sell high, buy low)" or am I misunderstanding?
    – armamoyl
    Apr 9 '16 at 3:07
  • Absolutely correct, my bad. The version I learn assumed that once the capital was deployed in at least the amount you want that you would consider yourself finished. Another solution in this unusual event would be to just buy nothing instead and check again the next period. Either way, you very much want to avoid selling back-end load mutual funds within the holding period.
    – rhaskett
    Apr 9 '16 at 6:19

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.

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