Investing by Averaging
We would like to Thank you for sharing our article on Introspective Thinking in your social network. Today, let us explore the logic of Investing by Averaging Down strategy.
You might have heard of Dollar Cost Averaging or Rupee cost averaging and it would have made you feel “WOW it is very Simple“. When it comes to marketing Systematic Investing Plans (SIP) by mutual fund agents, you might have come across many examples of Cost Averaging doing wonders! Yes, using SIP route, returns are smooth due to Cost Averaging. However, returns may be more or less than Lump-sum investing depending on when the investment was made.
There is 8th Wonder called Compounding! In a rising market, SIP returns will be less than lump-sum investment, because larger investments of SIP don’t get time for compounding than the time lump-sum investment gets. In a falling market, SIP investment will outperform lump-sum investment.
Let us assume that a smart investor who is not willing to pay hefty management fees to Fund Houses. He wants to emulate such strategy in his stock buying. As he believes it’s a damn simple approach, he can do it by buying more shares when the price of stocks trades lower than his initial purchase price.
For example, assume that he had bought 10 shares at Rs. 100. If the price comes down to Rs.50, then buying 20 shares at Rs. 50 will bring down the total buying average price to Rs.66.6. Hypothetically, if the price falls to Rs.25, then buying 40 more shares at Rs.25 will slash the average buying price to Rs.42.8. As per his understanding, the simple process is to continue buying whenever price goes below his previous average price. He will be justifying his decision by thinking that, one or the other day the price is going to bounce back and he will make a decent profit.
Theory and Practice of Investing
Theoretically, it looks very simple and attractive. But practically, it is very difficult to make consistent money with this strategy. From now, kindly ask yourself the questions below, before pouring down your money on only one stock.
Have you done your homework (detailed analysis) on this particular stock?
Are you convinced about your research and the company’s future prospects?
What is your action plan if your entire savings has been invested in a stock on Averaging Down strategy and the price continues its southward journey?
If your decision is justifiable to you, is it advisable to put money on a single stock?
What will you do if the price stays below your average buying price for years?
What is your action if you need money for any emergency purpose?
It’s prudent to ask yourself the above questions before investing, instead of burning your fingers from mistakes. With simple methods, one can create wealth. I am grateful to you, for giving me an opportunity to seed a thought in your mind!
Realizing your Dream:
I personally mentor enthusiastic people, who have their dream to earn Consistently from Stock/Commodity/Currency market by Investing or by becoming a full-time trader. If you are keen to know how to make money from Investment/Trading with simple yet powerful methods, you can contact me
PS: Special Thanks to Indrazith