Dell was a monster performer for years, until competitors figured out its strategy and the growth of the personal-computer business slowed. Then Dell became the classic value trap. Many of the great value investors—such as Warren Buffett and Marty Whitman, who launched the Third Avenue funds—have said that averaging down is a key strategic tool.
Buffett hopes a stock will fall after he starts buying so he can buy more at a cheaper price. When it works. Averaging down makes sense under two circumstances. Or average down when nothing about a company has changed except its share price. I just took the latter approach with Adamis Pharmaceuticals ADMP , a tiny firm that is seeking approval for new drug-delivery systems for the allergy- and respiratory-medication markets.
Just like that, averaging down has turned a tidy gain into an even bigger profit. What a strategic tool! Of course, the story is far from over. Skip to header Skip to main content Skip to footer. Skip advert. Home investing stocks. Are Stocks Cruising for a Bruising? Most Popular.
Best Places. We picked cities across the U. Then move on to your next investment. If you're more focused on long-term investments in companies, then averaging down may make sense. It allows you to accumulate more shares at a lower price—as long as you are convinced the company is fundamentally sound.
You may end up owning more shares at a lower average price, and potentially turning a pretty profit. It's quite possible to lose money when you average down. If you keep purchasing shares of a stock, and its price continues to fall, you will lose money on your investment. It's a risky strategy—one that you should only employ if you have a good understanding of the company involved and strong confidence that it will bounce back.
There's no way to tell a set break-even point when you are averaging down. The strategy is only effective if the stock eventually rebounds, and the price goes back up. If it continues to fall, you'll lose money, and it's just a question of when you need to cut your losses.
It can be an investing mistake to average down just to make your purchase look better. Traders have been known to use the average-down method to make the initial stock purchase look good. If the stock continues to decline, it is harder to cover up the fact that you purchased stock that has gone down in price.
Voya Financial. Table of Contents Expand. Table of Contents. Is Averaging Down Effective? When It's Not Worth It. The Bottom Line. Averaging Down FAQs. Is averaging down a way to cover up a stock purchase mistake? By Ken Little Full Bio LinkedIn Twitter Ken Little has more than two decades of experience writing about personal finance, investing, the stock market, and general business topics. Learn about our editorial policies. Reviewed by Amilcar Chavarria. Amilcar Chavarria is a fintech and blockchain entrepreneur with expertise in cryptocurrency, blockchain, fintech, investing, and personal finance.
Learn about our Financial Review Board. Do you lose money when you average down stocks?
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I agree with comments of Sue Carr. Most investors have a habit of doubling down when the stock is going down. They may increase holding if the. Many of the great value investors—such as Warren Buffett and Marty Whitman, who launched the Third Avenue funds—have said that averaging down is. Bengt Saelensminde looks at the practice of 'doubling down', a risky investment technique used by hedge funds that can turn losing stocks into '.