Averaging Down

Monday, 6th April 2009 09:38 - by Boredmum

I think it’s fair to say that it is not always wise to ‘average down’ (buying more shares as the price falls). Certainly in some instances it can be a good idea, but you have to look at each situation individually. Let’s look at a couple of my averaging-down experiences, bad and good: 1. I purchased shares in Woolworths (TIDM code: WLW) at 13p, which of course I thought was a really good price. When the price was going down I thought since it was so low it would be a good idea to bring my average down. After all, I had seen it fall and recover before. I was pleased at the time as eventually I brought my average down to 3p. Hindsight is a wonderful thing…the share price was falling because the company was in trouble and that is why the SP was down. Woolworths went into administration and all I had done was throw good money after bad, thinking I would see a recovery. 2. Cambrian Mining (TIDM code: CBM) was a different story. I bought in at 32p or thereabouts as I thought this had hit bottom. The SP went down further and I bought more in the 18p range, taking my average to 24p. The CBM share price rose and I sold at 32p and made a profit. If I hadn’t averaged down I would not have seen any profit from CBM so, in this instance, it worked for me. Some people believe in not ‘going all-in’, but dipping your toe in and keeping funds to feed into a company, that way you can get a feel for when the bottom is near.