I feel this strategy is good stock investors who have carefully created their investment portfolio of diversified stocks or funds they intend to buy and hold for long term
Averaging down is an investing strategy in which a stock owner purchases additional shares of a previously initiated investment after the price has dropped further. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
As an example, an investor who bought 100 shares of a stock at 50 per share might purchase an additional 100 shares if the price of the stock reached 40 per share, thus bringing her average price down to 45 per share.
- Averaging down means adding to an investment when its price drops.
- This technique can be useful when carefully applied with other components of a sound investing strategy.
- Adding more shares increases risk exposure and inexperienced investors may not be able to tell the difference between a value and a warning sign when share prices drop.
The strategy is often favored by investors who have a long-term investment horizon and a value driven approach to investing. Investors that follow carefully constructed models they trust might find that adding exposure to a stock that is undervalued, using careful risk management techniques can represent a worthwhile opportunity over time.
Many professional investors who follow value-oriented strategies, including Warren Buffett, have successfully used averaging down as part of a larger strategy carefully executed over time