Investing in Uncertain Times - Part 1

On December 31 1999 the Dow Jones Industrial Average closed at 11,476 points and then progressed steadily upwards till October 2007 where it peaked at an all time high of 14,164. From that point it fell to a low of 6,594 (-53%) in March 2009 before recovering to end 2009 at 10,428 points. Still 26% below where it was ten years prior.

If you were a buy and hold investor you would have watched a healthy capital gain evaporate after seven years of growth followed by 3 years of decline. For the average investor this decline has been gut wrenching, to the point where their investment portfolio is now valued at less than what is was 10 years prior. What is even worse is that if you were planning to retire in the next 2 to 3 years you would be now looking at either postponing your retirement or being resigned to the fact of retiring on a much lower income than previously planned.

So the magic question is….. Given these uncertain and turbulent economic times, what should an investor invest in?   I will try to answer this question is several parts.

First, we have to recognize that times have changed and the speed at which information travels and can be accessed, has changed the dynamics of investing in general. The internet has now given the average investor access to information that was once the domain of investment advisors and brokerage firms. Get financially educated, do your research and take action.  

Secondly, history is a great teacher, so I will refer a 500 year old quote by Jacob Fugger the Rich (1459-1525), one of the wealthiest men in the world at that time.

“Divide your fortune into four equal parts: stocks, real estate, bonds and gold. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate, during deflation, you lose on real estate and win on bonds, while your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back to the four equal parts.”

As the above quote illustrates, Jacob Fugger could also be considered the father of modern asset allocation. He clearly recognized the uncertainty of economic trends and the importance of diversification as a means of building and preserving wealth. To our knowledge, he was also the earliest to articulate the importance of strategic asset allocation and periodic portfolio rebalancing as bedrock principles of wealth management. Jacob Fugger’s strategic allocation was the essence of simplicity: He divided his fortune into four equal parts, with two of the four parts being in financial assets (stocks and bonds) and two being in real assets (gold and real estate).

Can modern investors learn anything from Jacob Fugger?

To be sure, his approach of dividing his assets into different categories would appear to be nothing more than common sense. And the old saying “don’t put all your eggs in one basket” must surely predate Jacob the Rich.

But if his approach was rooted in common sense, it also required uncommon discipline to implement. His advice to “be prepared to lose on one of them most of the time” indicated a rather steely emotional makeup that many investors would be hard pressed to imitate. And his advice to rebalance the portfolio “whenever performance differences cause a major imbalance” is obviously much easier said than done. That’s because it involves selling the asset class that has done well recently and putting money back into the asset class that has underperformed. Most financial advisors will testify that it is emotionally very difficult for investors to follow that approach.

In other words, instead of taking money away from the top-performing asset and adding money to the lagging asset, investors as a group have tended to do the exact opposite. That is why Jacob the Rich’s rebalancing approach requires uncommon discipline – because it requires going against the crowd and resisting the very natural impulse to chase performance.

Here is one way to make rebalancing easy, it’s called Value Averaging (VA). Value Averaging is a combination of its better-known cousin - "dollar-cost averaging" and "portfolio rebalancing". When a portfolio is underperforming, share prices are likely to be low. And that’s when you’ll be investing more to make up for the underperformance. When the portfolio is outperforming your target rate return, share prices are likely to be high. That means it is not a good time to buy and you could even sell for a profit, provided you maintain your predetermined average growth rate.

Value Averaging is a simple strategy but it is not easy to implement. It is a formula-based method and requires calculating what your investment should be at each period, and it is going to be different every time. Research has shown that value averaging has statistically been proven to outperform other investment methods. A VA fund or investment program will inherently reduce an investor’s risk level and enhance their investment returns.

Value Averaging is an easy way to ensure you follow one of the most well known investment mandates: Buy low and sell high. The method is particularly valuable during times of high volatility and it helps ensure that investors maintain discipline in their investing.

Let us look at some data. Assuming that using the VA strategy, you invested on October 1 2007 just before the market peaked into the Vanguard Total Stock Market ETF (VTI - provides returns similar to the DOW and S&P500). You would have earned a total return of 12.05 percent compared to 9.62 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones Index, as of Dec 31, 2009.

If compared to the S&P Small Cap 600 ETF (IJR) which is a more volatile index, the results are even better. You would have earned a total return of 15.90 percent compared to 11.26 percent using Dollar Cost Averaging and minus 26 percent for the Dow Jones.

Value Averaging helps investors to tide over market volatility without worrying too much about market timing.

In my next blog I will discuss the other part of Jacob Fugger’s investment approach, that is, investing in real assets.



P.S. Have you rebalanced your portfolio lately?

To learn more about how the Value Averaging investment strategy works visit:

To learn more about Jacob Fugger visit


  1. Good article. I like the value averaging idea


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