What it is
Averaging down is a strategy that involves buying more units of an investment when its price drops. You may do this with assets like stocks or pooled funds.
The goal is to lower the average price you will have paid for all your shares or units over time.
This may allow you to maximize your returns if the asset recovers and grows in value in the long run.
What it means for you
You can consider averaging down if you’re investing in an asset for the long term and are confident in its growth potential.
Instead of worrying about the price going down, you may see it as an opportunity to improve your returns since you believe the price will go back up.
For example, if you bought 10 shares of a company’s stock for P100 each, the average price is P100. If the price falls to P90 per share and you average down by buying another 10 shares, your new average is P95.
One of the ways to earn through investing is to “buy low and sell high,” and so minimizing your average cost can be a good thing.
However, there’s no guarantee that prices will always recover. If an investment’s performance worsens after you average down, you could potentially lose more money.
It’s important to do your research before following this method. Understand why the price is falling and whether there’s a solid reason to continue investing.
