Averaging Down

Averaging down has positive connotations. If I add when the price has risen I do it through gritted teeth. Somehow I don’t find myself using the term ‘averaging up’. As Edmund says, it’s all emotional terminology.

I agree that before “averaging down” one should consider carefully why the price has dropped. I usually have a long look to see what I might have missed, and try to work out why selling has happened.

When spreadbetting I estimate the lowest price a share could credibly go to and have enough cash in the account to cover 100% of the difference between that and my opening price, plus the required margin on the remainder. Not 100% risk-free but a reasonable compromise.  In practice I may be a little over that limit. I’m using spreadbets to reduce actual holdings of medium-term ex-ISA investments like CHL (but not for bottom-drawer who-knows-when-they’ll-come-good investments like GNG) and thereby raise a little cash to take up my ISA allowance. Being lazy I have no earned income to fund the ISA with.

It’s a bit of a dilemma – take up the ISA allowance or just put the money in the spreadbet account. I can probably grow the spread betting account faster than the ISA, but it grates not taking my allowance up in full. They should really allow the full range of investment vehicles in ISAs, otherwise it’s limitation of choice masquerading as a savings vehicle.

Nowadays I wait for more of a drop before adding to a fairly underwater position, as the drop, even if unwarranted (as was usually the case), often used to continue deeper than I expected.

My favourite reasons for buying on the dip are:

• A general market & sector correction that has drawn in stocks inappropriately.
• Speculative/momentum based shorting (I let it run a bit)
• Overhangs preferably close to clearing

Edit: I try to do this off the back of a day-job and so enjoy a ‘margin of safety’, in the form of a monthly pay cheque, that many here do not. It’s those folk that I have the highest possible regard for. They are backing their judgement in a way that most investors do not and likely will never do. Until then I will just keep at it and keep learning along the way as best and as profitably as I can