The ins and outs of…averaging down

Article Excerpt

Sometimes a stock moves downward and creates what we consider a “buying opportunity.” We apply that term when we feel an attractive stock has dropped in price for reasons of a passing nature or ones that are exaggerated in investors’ minds. This should not be confused with “averaging down.” That’s when you buy more of a stock you own when its price falls, mainly to lower your average cost per share. However, this averaging-down strategy will almost certainly cost you money in the long run. Here’s why: Averaging down is entirely focused on share prices. The main problem with averaging down is that you are picking stocks based on a single factor: the drop in the price of the stock. That means you are not considering the company’s overall investment quality or the stock’s place in your portfolio diversification strategy. Unknown negatives can cause stocks to drop—and keep falling. Some investors go through a phase when they automatically buy more of anything they own…