I have received a number of emails and private messages the past couple of days seeking my advise on whether they should “average down” their shareholdings in a company.
This post was originally posted here. The writer, Lim Jun Yuan is a veteran community member and blogger on InvestingNote, with username known as ljunyuan and has 1055 followers.
While I am unable to give you a definite answer on whether or not you should “average down”, as all investors think and do things differently, and are unique in their own ways, but there are a few things (3 in particular) you can ask yourself which I hope will help you make the final decision.
Before I reveal what these three things are, let me first talk a bit about what does “averaging down” mean (for those who may be hearing about this for the first time) – in layman terms, it simply mean you increase your shareholdings in a company that is currently trading at a lower price, and in so doing, you bring down the average price of your shareholdings in the company.
To explain this with a simple example, let’s say you originally have 1,000 shares of Company A at S$10.00. However, the share price of Company A is now trading at just S$5.00, and the act of “averaging down” means you increase your shareholdings in Company A at its current trading price; assuming you decide to buy another 1,000 shares at S$5.00, then the average price of your shareholdings in Company A becomes S$7.50 now, which can be calculated as follows:
Initial Purchase: 1,000 shares x S$10.00/share = S$10,000
Additional Purchase: 1,000 shares x S$5.00/share = S$5,000
In total, you have now invested a total of S$15,000 in 2,000 shares of Company A.
As such, your average price in Company A is S$15,000 divided by 2,000 shares = S$7.50
Now that you have a better understanding of what “averaging down” means, let me share the three things you can look at to help you decide whether or not you should do so: