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Value averaging is a formula investment strategy which can be shown to achieve a lower average cost and higher Internal Rate of Return (IRR) than alternative strategies. However, in contrast to previous studies, this paper shows that this does not lead to higher expected profits. Instead an "Averaging down" effect systematically biases the IRR up and the average purchase cost down. The same bias applies to a wide class of investment strategies (including dollar cost averaging) where the amount invested in each period is negatively correlated with the return made to date.
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