Averaging Down - Should You Buy More Shares When The Price Drops?

It happens to all investors sooner or later (usually sooner). What should you do when your shares fall in price?  Should you average down?

Averaging Down

What does average down mean? It simply means to buy more shares after the price has fallen below what you initially paid for the shares.  It means that your average purchase price will be lower.

For example, if you bought $5,000 worth of Telstra shares back in May at $5.00 per share, you would have 1,000 shares at an average purchase price of $5,000.

Then when the Telstra share price fell to $4.50 a month later, if you decided to buy another $5,000 worth, you would have averaged down. You lowered your average purchase price.  You would have bought 1,111 additional shares and you average purchase price (across both lots of shares) would now be about $4.74.

Buy, Sell or Hold?

At the risk of stating the obvious, there are 3 options available to you.

1. Sell
2. Hold on
3. Buy more

Unfortunately, choice is rarely clear cut.

When should you sell?

In my experience, you should not sell just because the share price has fallen.  This will just crystallize the loss.

However, if you realize you have made a mistake and the shares are not worth as much as you originally thought, that might be a reason to sell.  Or if there has been an unexpected development which now causes you to believe the shares are worth less than originally anticipated, that may also be a reason to sell.

When to hold

Take another look at your investment.  Does it still make sense?  Are the reasons you first bought the shares still valid?  If your investment still looks sound, then there is no need to panic just because the market disagrees with you.

When to buy more

If, after taking a good look at the reasons you bought the shares, you are still convinced of the merits of your investment then a fall in share price could be an opportunity to buy some more shares at a lower price.

Any decision to buy more should also take into account any portfolio limits you normally adhere to.  Would a further investment make your investment portfolio too concentrated in a single stock or industry?

When dealing with the vagaries of shares prices, I try to keep in mind the following quote from Warren Buffett - "You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right".