Never Average in a Downward market
The popular perception regarding averaging shares is that “Average your shares when the market is going down so that you may sell your shares at higher profits later.” But an intelligent investor always stays in the safe-side and keeps himself prepared for the worst possible situation.
A while ago, I had talks with a highly experienced stock market thinker (who wished to remain unnamed). As he exemplified to me, if an investor keeps on buying shares in a downward market in order to average his previous holdings, he might run the risk of not being able to sell his shares at profits if the market continues to go downward. And even if the market goes up, a rise at much higher percentages is required for reaching equilibrium let alone making profits. On the other hand, if an investor averages when the market is on an upward trend, he has every chance to sell his holdings profitably right after averaging and this action also makes him immune to possible subsequent market drops at a high extent.
Following his view, I drew an illustrative table and saw that-
---averaging at a rising market greatly increases an investor’s tolerance for decreasing prices whereas,
---averaging in a downward market increases the probability of making losses as the more an investor averages, the more his requirement for market-rise enhances.
For example, as the illustration shows, if an investor averages for the third downward week, his holdings require a 12.5% rise in the market in order to be sold at equilibrium let alone to be sold at profits. But with the same time duration, an investor averaging in an upward market enjoys a cushion till there is an 8.33% drop in the market prices.
Hence, I suggest that in whatever stock you invest, always invest intelligently and avoid averaging in downtrends. But, as the final note, I must remind that the key to reaping the benefits of an upward market lies only on how efficiently you can predict the timing of the trends.
--- Tanzina Ahmed Choudhury ---