Given the smooth upward trajectory stocks have had for the past 15 years, it’s easy to think that the almost-20% decline so far in 2022 is just a blip. But it’s also possible that the next few years might look more like 1929-1943, or 1966-1974, when stocks were on an up-and-down roller coaster that eventually ended up where they’d started. If that’s the case, investors will need to readjust, because the strategies that have worked in the past decade and a half won’t work in such a rocky market, writes Jason Zweig in The Wall Street Journal.
One tool to sharpen for your toolbox would be value averaging, Zweig contends, which combines dollar-coast averaging and rebalancing. Investors decide on an amount they want to grow their account in a certain length of time then, when stocks tumble, they add to their holdings in order to hit that target amount. And when stocks rise, investors would buy less or even sell-off if the stock skyrockets. This method was devised by the former chief economist at the Nasdaq stock exchange, Michael Edleson, who told The Journal that investors who use this strategy “have recommitted to bury their demons.” In other words, they stick to their intentions instead of falling into the buying-high-and-selling-low trap.
However, the risk of underperformance still exists in value averaging, though it does tend to do better in periods of high volatility. That could make it ideal for the current market, especially for investors who are realistic in thinking that the market probably won’t return to its previous upward trajectory anytime soon. Value investing takes discipline—an “investing superpower,” Zweig writes—but it could also help investors stay on track with their goals.