Averaging Down

Averaging down is an investment strategy that involves purchasing additional shares of a stock you already own after its price has declined. By buying at lower prices, you reduce the average cost per share of your total position, making it easier to profit if the stock eventually recovers. For example, suppose you buy 100 shares at $50 ($5,000 total). If the price drops to $40 and you buy another 100 shares ($4,000), your average cost becomes $45 per share (200 shares for $9,000 total). If the stock recovers to $50, you'd break even instead of needing the original $50 price. Averaging down can be a sound strategy when a stock's decline is due to temporary factors rather than fundamental deterioration. If you believe in a company's long-term prospects and the market is offering shares at a discount, buying more can enhance returns when the stock recovers. However, averaging down carries significant risks. If a stock is declining because of genuine business problems, buying more means increasing exposure to a troubled investment. You could end up with a larger position in a stock that continues falling, compounding your losses. This is sometimes called "catching a falling knife." Successful averaging down requires discipline and analysis. Key questions include: Has my original investment thesis changed? Is the decline due to market sentiment or company fundamentals? Do I have conviction in the eventual recovery? Can I afford the additional investment without overconcentrating my portfolio? Some investors use systematic averaging down through dollar-cost averaging - investing fixed amounts at regular intervals regardless of price. This removes the emotional element and ensures you're buying more shares when prices are low and fewer when prices are high. Averaging down is not appropriate for speculative positions or situations where your investment thesis has been invalidated. Knowing when to average down versus when to cut losses is an important skill that develops with experience.