At what percentage drop should you buy to average down
"TL;DR; There is no silver bullet. You have to decide how much to invest and when on your own.  Averaging down definition: DEFINITION of 'Average Down' The process of buying additional shares in a company at lower prices than you originally purchased. This brings the average price you've paid for all your shares down. BREAKING DOWN 'Average Down' Sometimes this is a good strategy, other times it's better to sell off a beaten down stock rather than buying more shares.  So let us tackle your questions: At what percentage drop of the stock price should I buy more shares. (Ex: should I wait for the price to fall by 5% or 10% to buy more.) It depends on the behaviour of the security and the issuer. Is it near its historical minimum? How healthy is the issuer? There is no set percentage. You can maximize your gains or your losses if the security does not rebound. Investopedia: The strategy is often favored by investors who have a long-term investment horizon and a contrarian approach to investing. A contrarian approach refers to a style of investing that is against, or contrary, to the prevailing investment trend.  (...) On the other side of the coin are the investors and traders who generally have shorter-term investment horizons and view a stock decline as a portent of things to come. These investors are also likely to espouse trading in the direction of the prevailing trend, rather than against it. They may view buying into a stock decline as akin to trying to ""catch a falling knife."" Your second question: How many additional shares should I buy. (Ex: Initially I bought 10 shares, should I buy 5,10 or 20.) That depends on your portfolio allocation before and after averaging down and your investor profile (risk apettite). Take care when putting more money on a falling security, if your portfolio allocation shifts too much. That may expose you to risks you shouldn't be taking. You are assuming a risk for example, if the market bears down like 2008: Averaging down or doubling up works well when the stock eventually rebounds because it has the effect of magnifying gains, but if the stock continues to decline, losses are also magnified. In such cases, the investor may rue the decision to average down rather than either exiting the position or failing to add to the initial holding.  One of the pitfalls of averaging down is when the security does not rebound, and you become too attached to be able to cut your losses and move on. Also if you are bullish on a position, be careful not to slip the I down and add a T on said position. Invest with your head, not your heart." "A big part of the answer depends on how ""beaten down"" the stock is, how long it will take to recover from the drop, and your taste for risk. If you honestly believe the drop is a temporary aberration then averaging down can be a good strategy to lower your dollar-cost average in the stock.  But this is a huge risk if you're wrong, because now you're going to magnify your losses by piling on more stock that isn't going anywhere to the shares you already own at a higher cost. As @Mindwin pointed out correctly, the problem for most investors following an ""average down"" strategy is that it makes them much less likely to cut their losses when the stock doesn't recover.  They basically become ""married"" to the stock because they've actualized their belief the stock will bounce back when maybe it never will or worse, drops even more." Only average down super blue chips with a long history or better still, ETFs or index type funds. I do it with income producing funds as I'm a retiree. Other people may have much shorter horizins.
If your gut told you to buy during the depths of '09, your gut might be well-calibrated. The problem is stock market declines during recessions are frequently not that large relative to the average long run return of 9%:  A better strategy might be hold a percentage in equities based upon a probability distribution of historical returns.  This becomes problematic because of changes in the definition of earnings and the recent inflation stability which has encouraged high valuations:  Cash flow has not been as corrupted as earnings now, and might be a better indicator:  This obviously isn't perfect either, but returns can be improved. Since there is no formulaic way yet conventionally available, the optimal primary strategy is still buy & hold which has made the most successful investor frequently one of the richest people on the planet for decades, but this could still be used as an auxiliary for cash management reserves during recessions once retired. Dollar cost averaging works if the stuff you're buying goes up within your time horizon.  It won't protect you from losing money if it doesn't. Also consider that the person (or company, or industry) that suggests dollar-cost averaging might want you to start up a regular investment program and put it on auto-pilot, which subsequently increases the chance that you won't give due attention to the fact that you're sending them money every paycheck to buy an investment that make them money regardless of whether you make money or not. Points are index based.  Simple take the total value of the stocks that compose the index, and set it equal to an arbitrary number. (Say 100 or 1000)  This becomes your base.  Each day, you recalculate the value of the index basket, and relate it to the base.  So if our index on day 0 was 100, and the value of the basket went up 1%, the new index would be 101 points. For the example given, the percentage change would be (133.32 -133.68  ) / 133.68 * 100% = -0.27%  Keep in mind that an index basket will change in composition over time.  Assets are added and removed as the composition of the market changes.  For example, the TSX index no longer includes Nortel, a stock that at one time made up a significant portion of the index.  I'm not sure if a percentage drop in an index is really a meaningful statistic because of that.   It is however, a good way of looking at an individual instrument. Swiss Central bank has a floor of 1.20, the reason why I have this pair is that my downside is limited.  The actual differential is about 20 bps but im leveraged 50:1, which gives me a fun 10% annualized. I bought in at 1.2002, meaning my max downside on an investment of 20K (gives 1mn of exposure), is 200$ and my potential profit is 2000. Creating a risk to return of 10:1. If you were to stick to your guns, then yes, that's what you'd need to do. In practice, that kind of a hit should get your attention, and you'd be wise to look at why your investment dropped 10% in a month. Value averaging, dollar-cost averaging, or any other investment strategy needs to be done with eyes open and ears to the ground.  At least with value averaging you need to look at your valuation each month!  From my own experience, dollar-cost averaging breeds laziness and I ended up not paying much attention to what I was investing in, and lost a fair bit of money. Bottom line is you still have to think about what you're doing, and adjust. "From some of your previous questions it seems like you trade quite often, so I am assuming you are not a ""Buy and Hold"" person. If that is the case, then have you got a written Trading Plan? Considering you don't know what to do after a 40% drop, I assume the answer to this is that you don't have a Trading Plan. Before you enter any trade you should have your exit point for that trade pre-determined, and this should be included in your Trading Plan. You should also include how you pick the shares you buy, do you use fundamental analysis, technical analysis, a combination of the two, a dart board or some kind of advisory service? Then finally and most importantly you should have your position sizing and risk management incorporated into your Plan. If you are doing all this, and had automatic stop loss orders placed when you entered your buy orders, then you would have been out of the stock well before your loss got to 40%. If you are looking to hang on and hoping for the stock to recover, remember with a 40% drop, the stock will now need to rise by 67% just for you to break even on the trade. Even if the stock did recover, how long would it take? There is the potential for opportunity loss waiting for this stock to recover, and that might take years. If the stock has fallen by 40% in a short time it is most likely that it will continue to fall in the short term, and if it falls to 50%, then the recovery would need to be 100% just for you to break even. Leave your emotions out of your trading as much as possible, have a written Trading Plan which incorporates your risk management. A good book to read on the psychology of the markets, position sizing and risk management is ""Trade your way to Financial Freedom"" by Van Tharp (I actually went to see him talk tonight in Sydney, all the way over from the USA)." "Option 1 is out. There are no ""safe returns"" that make much money. Besides, if a correction does come along how will you know when to invest? There is no signal that says when the bottom is reached, and you emotions could keep you from acting. Option 2 (dollar cost averaging) is prudent and comforting. There are always some bargains about. You could start with an energy ETF or a few ""big oil"" company stocks right now." Real world example.    AGNC = 21.79 time of post.  Upcoming .22 cents ex-div Mar 27th Weekly options Mar 27th - $22 strike put has a bid ask spread of .22 / .53. If you can get that put for less than .21 after trade fee's, you'll have yourself a .22 cent arbitrage.   Anything more than .21 per contract eats into your arbitrage.  At .30 cents you'll only see .13 cent arbitrage.  But still have tax liability on .22 cents.  (maybe .05 cents tax due to REIT non-exempt dividend rates)  So that .13 gain is down to a .08 cents after taxes. "You've laid out a strategy for deciding that the top of the market has passed and then realizing some gains before the market drops too far.  Regardless of whether this strategy is good at accomplishing its goal, it cannot by itself maximize your long-term profits unless you have a similar strategy for deciding that the bottom of the market has passed.  Even if you sell at the perfect time at the top of the market, you can still lose lots of money by buying at the wrong time at the bottom. People have been trying to time the market like this for centuries, and on average it doesn't work out all that much better than just plopping some money into the market each week and letting it sit there for 40 years. So the real question is: what is your investment time horizon?  If you need your money a year from now, well then you shouldn't be in the stock market in the first place.  But if you have to have it in the market, then your plan sounds like a good one to protect yourself from losses. If you don't need your money until 20 years from now, though, then every time you get in and out of the market you're risking sacrificing all your previous ""smart"" gains with one mistimed trade.  Sure, just leaving your money in the market can be psychologically taxing (cf. 2008-2009), but I guarantee that (a) you'll eventually make it all back (cf. 2010-2014) and (b) you won't ""miss the top"" or ""miss the bottom"", since you're not doing any trading." "If I buy property when the market is in a downtrend the property loses   value, but I would lose money on rent anyway. So, as long I'm viewing   the property as housing expense I would be ok. This is a bit too rough an analysis.  It all depends on the numbers you plug in.  Let's say you live in the Boston area, and you buy a house during a downtrend at $550k.  Two years later, you need to sell it, and the best you can get is $480k.  You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc.  Say that's another $10k a year, so you are down $70k + $20k = $90k.  It's probably more than that, but let's go with it... In those same two years, you could have been living in a fairly nice apartment for $2,000/mo.  In that scenario, you are out $2k * 24 months = $48k--and that's it.  It's a difference of $90k - $48k = $42k in two years.  That's sizable. If I wanted to sell and upgrade to a larger property, the larger   property would also be cheaper in the downtrend. Yes, the general rule is:  if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.   However, if the market is in an uptrend, selling the property would   gain me more than what I paid, but larger houses would also have   increased in price. But it may not scale.  When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses.  That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.   Do both of these scenarios negate the pro/cons of buying in either   market? I don't think so.  I think, in general, buying ""more house"" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable.  Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.   The other point is, as with any trend, you only know the future of the trend...after it passes.  You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.   In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point:  let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!" The risk of the particular share moving up or down is same for both.   however in terms of mitigating the risk, Investor A is conservative on upside, ie will exit if he gets 10%, while is ready to take unlimited downside ... his belief is that things will not go worse .. While Investor B is wants to make at least 10% less than peak value and in general is less risk averse as he will sell his position the moment the price hits 10% less than max [peak value] So it more like how do you mitigate a risk, as to which one is wise depends on your belief and the loss appetite "If you're talking about a single stock, you greatly underestimate the chances of it dropping, even long-term. Check out the 12 companies that made up the first Dow Jones Industrial Average in 1896. There is probably only one you've heard of: GE. Many of the others are long gone or have since been bought up by larger companies. And remember these were 12 companies that were deemed to be the most representative of the stock market around the turn of the 20th century. Now, if you're talking about funds that hold many stocks (up to thousands), then your question is a little different. Over the long-term (25+ years), we have never experienced a period where the overall market lost value. Of course, as you recognize, the psychology of investors is a very important factor. If the stock market loses half of its value in a year (as it has done a few times), people will be inundated with bad news and proclamations of ""this time it's different!"" and explanations of why the stock market will never recover. Perhaps this may be true some day, but it never has been thus far. So based on all the evidence we have, if you hold a well-diversified fund, the chances of it going down long-term (again, meaning 25+ years) are basically zero." You should know when to sell your shares before you buy them. This is most easily done by placing a stop loss conditional order at the same time you place your buy order. There are many ways to determine at what level to place your stop losses at. The easiest is to place a trailing stop loss at a percentage below the highest close price, so as the price reaches new highs the trailing stop will rise. If looking for short to medium term gains you might place your trailing stop at 10% below the highest close, whilst if you were looking for more longer term gains you should probably place a 20% trailing stop. Another way to place your stops for short to medium term gains is to keep moving your trailing stop up to just below the last trough in an existing uptrend. The optimal time period is unambiguously zero seconds.  Put it all in immediately.  Dollar cost averaging reduces the risk that you will be buying at a bad time (no one knows whether now is a bad or great time), but brings with it reduction in expected return because you will be keeping a lot of money in cash for a long time.  You are reducing your risk and your expected return by dollar cost averaging. It's not crazy to trade expected returns for lower risk.  People do it all the time.  However, if you have a pot of money you intend to invest and you do so over a period of time, then you are changing your risk profile over time in a way that doesn't correspond to changes in your risk preferences.  This is contrary to finance theory and is not optimal.  The optimal percentage of your wealth invested in risky assets is proportional to your tolerance for risk and should not change over time unless that tolerance changes. Dollar cost averaging makes sense if you are setting aside some of your income each month to invest.  In that case it is simply a way of being invested for as long as possible.  Having a pile of money sitting around while you invest it little by little over time is a misuse of dollar-cost averaging. Bottom line: forcing dollar cost averaging on a pile of money you intend to invest is not based in sound finance theory.  If you want to invest all that money, do so now.  If you are too risk averse to put it all in, then decide how much you will invest, invest that much now, and keep the rest in a savings account indefinitely.  Don't change your investment allocation proportion unless your risk aversion changes. There are many people on the internet and elsewhere who preach the gospel of dollar cost averaging, but their belief in it is not based on sound principles.  It's just a dogma. The language of your question implies that you may be interested in sound principles, so I have given you the real answer. How about this rule? Sell 10% of your shares every time they double in price.  (of course, only buy stocks that repeatedly double in price)