Should I Average Up Or Average Down?

This is a very interesting question that gets debated often on social media. 

In averaging up, it is about loading up more at new higher prices when it shows that your investment thesis to buy is right as the price moves up. In averaging down, it is about buying more at more depressed prices so as to lower down your average cost so that you may breakeven more easily and to profit even more at some time in the future, if it does go up. As such it involves buying more, when you still appear to be “wrong”.

Both seem to have their merits and sound like a good thing to do. But how can equally opposite actions be both correct?

Let me share with you what The Joyful Investors do. In practice we do both of them, but the majority of the time we opt to average down. The premise is of course the stock in question is one that is fundamentally sound and that one must be fairly good at market timing.

If the company is going to continue to do well and make new all time highs in the future, it is common sense that if we bought at a lower average cost by averaging down earlier, we would be able to maximize my margins as compared to if we were to average up. For the purpose of maximizing investment returns over the long run, averaging down is no doubt the best way to go. This is also helped by the fact that we have been fairly accurate in timing our purchases near to the dips and bottoms the majority of the time. For those who have followed us on our public Telegram channel and our inner community would know first hand. 

So in that case why do we average up at all?

The answer is, momentum usually works in your favor when you average up. It could be due to the fact that we are going back up in a new uptrend. While we do not enjoy a higher upside, we save time from waiting for the stock price to have the momentum to go back up and time is money as well. The drawback is that sometimes prices may have moved up considerably after picking up momentum which would then not be a good price to buy in anymore. And the fact is that when it becomes obvious to most retail investors that they should average up, usually it is a bit too late.

The exact timings where we average down or up are covered in our Moneyball Investors Playbook course which optimizes our risk to reward ratio when doing so.

Hence, for a less experienced investor with a long term horizon seeking to capture more long term absolute gains, averaging down on good stocks is usually a better defensive play rather than trying to catch the momentum when the stock price is on the way up. There are then of course investors who also just simply dollar cost average regardless of the price movements which will put them in a good stead in the future so long as it is a good stock.