Let’s talk about averaging down stocks and how it can help as an investor.
What Is Averaging Down In Stocks?
Averaging down stocks is where you continue to buy stocks you already hold as the stock prices decline. This strategy has you buying your latest stocks at a lower price than your earlier ones, and the average cost declines.
I’m sure, as an investor, you understand “dollar cost averaging” (DCA). This is dollar cost averaging on a stock that has declined in value. Now, your average cost is also dropping or going down.
Is It Good To Average Down Stocks?
Ugg…. depends, but that’s not the answer you want to hear, so let’s break this down based on my experiences.
If A “Good” Stock Is Pulling Back.
Yes, in this case, if the stock is good, as the company’s fundamentals have not changed, then buying more stock at a lower price, averaging down, can work in your favor.
With my M1 Finance Dividend Portfolio, when a stock has lost value and holds a smaller percentage of my overall portfolio, M1 reinvestment, and new investments automatically buy stocks holding a lower percentage.
This way, I am always guying stocks that have lost value and adding to their holding. In this case, I view “averaging down” as “buying on sale.”
Now, I only hold on to good companies.
If A “Bad” Stock Is Pulling Back.
First, I’ve done it too often; I shouldn’t buy a “bad” stock. In this case, averaging down might not work in my favor, and cutting my losses might be best.
If A “Bad” Stock Is Pulling Back But Will Rebound
In this case, I might think about averaging down, so when the stock rebounds, I’ll have lowered my cost of ownership. When I sell, I will have a better chance of recovering from a wrong decision.
Can You Break Even Averaging Down Stocks?
If it continues to decline, no, from my math
If you buy a stock, say 100 shares at $100(Total $10,000), your average cost is $100.
Now, if the stock goes to $1, and you buy another 100 shares(Total: $100), you now have 100 shares at $100 and another 100 shares at $1; well, let’s do the math:
($10,000 + $100)/200 Shares = $50.50 is your average cost, but the shares are still worth $1.
In this case, you can only break even if there is a point where the stock price recovers. If the stock prices recover, you can see in our example that the break-even point is $50.50 instead of the original $100.
Your break-even point might occur earlier, and if it pulls back to the original $100 share price, you are now making a serious profit if you sell. FYI: Calculate The Break-even Point When Averaging Down – FAQ.
Is It Good To Average Down The Sell Stocks?
In the above examples, it was more of a buy-and-sell approach.
With a pullback and rebound, averaging down makes sense before a sale. It’s the rebound after a pullback back that helps recover or generate a profit before a sale.
With a constantly declining stock price on a stock you plan to sell, averaging down might not be the best thing to do. Some might say it’s throwing good money after bad.
Often, we find ourselves holding bag-holding stocks in this situation, hoping the price recovers in the future.
What if you plan to never sell your stock, like with a Dividend-oriented portfolio( Easiest Passive Income Generator (PIG) )?
Does Averaging Down Help Dividend Portfolios?
For me, yes! Averaging down on a dividend portfolio does help.
An example is my M1 Finance Dividend portfolio; I want to buy only good stocks from good companies and hold on to them forever. HODL-approach.
So when their stock prices decline, I add more money to the portfolio or, with M1 Finance, any dividends automatically buy stocks below their target percentage.
In this Dividend portfolio, I have 100 Stocks and ETFs. As one decreased in value compared to the others, it fell below my 1% holding set-point. So, M1 Finance auto buys the falling stocks and averages down for me.
I want to increase my holding in that stock back to 1%.
Averaging down in a dividend portfolio works for me and is part of my plan.
 Myself with an interesting Bull Sculpture. Notice: No Lambo’s. :/ | Hi I’m Tom, A Blogger And A PIG Farmer. PIG Farmer as in I grow Passive Income Generators(PIG’s). I’ve been playing with stocks, mutual funds, and options for decades, as well as always working on my side hustle stacks. Unlike what you read online, I’ve yet to find a way to get rich quickly. Get Rich Quick isn’t happening for me. My journey has been long and continues. I hope to have so many PIGs I can stop working at my current job and volunteer as a medical worker overseas. Still waiting, but getting there. I still am a family man, and while on this Journey of Growing PIGs. I wanted to share my adventures(ups and downs), hoping you will contribute with your feedback and comments. Fun Fact: In my spare time, I am a Band-Dad! |