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Steve K

A Question I'm Pondering

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As above........

I have been investing in various funds over the last couple of years by drip feeding fixed amounts in every month, "dollar cost averaging" I believe it is called.

While I can see the benefits of this in a falling market and it is considered a positive thing, If I were to be buying equities, the same strategy could be called "averaging down" which is considered a bad thing.

Hmmmm??? what am I missing?

Cheers

Steve

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When I read it I thought it was either a joke post or a troll post. I still think so.

I'm sorry if I have come across that way. :(

I am a relatively new investor and my only experience so far is by buying into OEIC's every month with a fixed amount. This is where I can the benefit of what they call "dollar cost averaging".

Recently I have been trying to learn about investing direct into shares and have come across the term "averaging down."

Just thought the knowledgeable on this forum may be able to help me. It seems I have perhaps worded the question incorrectly, but unfortunately I can't think of another way.

Thanks for reading anyway.

Steve

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I'm sorry if I have come across that way. :(

I am a relatively new investor and my only experience so far is by buying into OEIC's every month with a fixed amount. This is where I can the benefit of what they call "dollar cost averaging".

Recently I have been trying to learn about investing direct into shares and have come across the term "averaging down."

Just thought the knowledgeable on this forum may be able to help me. It seems I have perhaps worded the question incorrectly, but unfortunately I can't think of another way.

Thanks for reading anyway.

Steve

It depends whether you are investing directly into Funds/Trackers or individual shares

Averaging down is generally thought of as bad in indivuidual shares (and id agree personally) because they can go to zero. The averager may get lucky now and again and reduce the point of Breakeven and tthe share recovers, but eventually one wont.

In short it is magnifying a mistake, averaging up in contrast is magnifying a correct decision

Having said that people find it harder to average up (which can feel like reducing profits) than average down which tends to feel more correct (an opportunity of escape and reducing losses (a common natural trap) ).

Edited by georgia o'keeffe

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I'm sorry if I have come across that way. :(

I am a relatively new investor and my only experience so far is by buying into OEIC's every month with a fixed amount. This is where I can the benefit of what they call "dollar cost averaging".

Recently I have been trying to learn about investing direct into shares and have come across the term "averaging down."

Just thought the knowledgeable on this forum may be able to help me. It seems I have perhaps worded the question incorrectly, but unfortunately I can't think of another way.

Thanks for reading anyway.

Steve

OK, sorry for any offence caused. The short answer is this : There is nothing wrong with "cost averaging", "averaging up" nor "averaging down". It is us humans who regularly feck up that makes it a problem.

Buying into OEIC/UTs/ETFs with a set amount is a decent way to start investing. You are basically "averaging up" and "averaging down" with small amounts (the small buys will not incur large costs with monthly savings plans). This is all good for the average investor.

The "pound cost averaging" with shares tends to only work with larger amounts, say £1k absolute minimum, due to cost of trading. Moreover, individual shares are much more volatile than a fund / tracker for obvious reasons. If you only had a set amount to invest in one share, it may be better to put in a lump sum and just keep it there (as you are convinced the fundamentals are sound) and reap the dividends / await growth.

The danger comes when there is a dip in price. You are still convinced the fundamentals are sound and so put in more money than you had wanted to. You may "average down" but are now overexposed.

For some graphs, take a look at CNT or HMV for some nice examples of why it is dangerous.

Look at XEL today. I had a small core holding and a relatively larger pot of cash sitting around (for opportunities just like today). I "averaged down", but jumped too early. It is so tough to call a bottom with these shares, hence the danger. I am now locked in at a loss, with no dividend income, until the price recovers. This is the danger.

Edit: p.s. try some investment books, a good start would be The Intelligent Investor.

Edited by Cash with Nowhere to Go

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p.s. try some investment books, a good start would be The Intelligent Investor.

Cheers. I have recently read "Fooled by Randomness" and have started "The Black Swan" today.

These books make you wonder if all the study is worth it..............

Thanks for the clarification. As I now understand it, due to the cost of trading and the volatility of single shares, averaging down is a bad idea although it is similar in principle to dollar cost averaging. Dollar cost averaging is fine because hopefully some of the wild mood swings are smoothed by the fund manager and the low cost of trading.............Clear as mud.......

Cheers

Steve

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Kind of. Basically don't invest more than you are prepared to lose, particularly with volatile shares. Unfortunately no share can be considered stable these days.

Two emotions you need to master are fear and greed. If you can beat these more often than not, you will be ok. Add in accurate risk assessment and money management and you'll be fine. Easy to do on paper.

Edit - to pick stocks you'll need hours acne hours every week. Not easy to do. And even then its easy to get it very wrong. So yes, perhaps just saving into tracker funds may be the best way for most people.

Edited by Cash with Nowhere to Go

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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