Sub-strategy: “averaging down”

Before I write a blog post on my main strategy in investing in equities, I shall first talk about a useful and seemingly simple “sub-strategy” which I had adopted: “averaging down”. “Averaging down” involves investing additional amounts in a financial instrument or asset if it declines significantly in price after the original investment is made.

The main advantage of averaging down is that an investor can bring down the average cost of a stock holding quite substantially. Assuming the stock turns around, this ensures a lower break-even price for the stock position and higher gains as compared to the situation in which the price of the stock was not averaged down.

From my own example, I had purchased Singtel at a price of $3.86 in July 2017 which was too high of a price to pay for Singtel. However, the price of Singtel plummeted to $2.96 in March 2019 due to the release of poor financial results. This was a good opportunity for me to purchase Singtel to “average down” the price of Singtel stocks I owned. However, it is important to note that there are some caveats to employing the “averaging down strategy”.

Averaging down should be done on a selective basis for specific stocks, rather than for every stock in a portfolio. This strategy is best restricted to high-quality blue-chip stocks. Such stocks have a positive long-term track record, strong competitive position, very low or no debt, stable business, and sound management

Before averaging down a position, the company’s fundamentals should be thoroughly assessed. The investor should ascertain that a significant decline in a stock is not a symptom of a deep-rooted problem. Minimally, factors that need to be assessed are the company’s competitive position, long-term earnings outlook and business stability. This leads me to my upcoming blog post on my adopted strategy with regard to investing in stocks. Stay tuned for it!

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