As from April 2013 my Journey in Investing is to create Retirement Income for Life till 80 years old for two over market cycles of Bull and Bear.

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Friday, 9 September 2011

Average Down or Average Up. Know Your Maths!

Read? Bear market is here. Let's accumulate more by average down? (2)

Before you decide to average down or average up, know your Maths. It is simple mathematics on risks.

Assuming you have 2-3 batches of $10K each to average down or average up.

When you average up, with the $10K per batch purchase you will be buying less and less quantity of stocks on the way up.

When you average down, with the $10K per batch purchase you will be buying more and more quantity of stocks on the way down.

More quantity of stock means more volatility in any unrealized P/L. Guess who will be losing sleep if the stock price keeps falling?






 

1 comment:

  1. Hi CW8888,
    From the book "Lizard Brain":

    "4: Do not losers average losers. Value- cost averaging to be effective must be very selective in the stock that is “very safe” and its’ price is lowered substantially after value- cost averaged".

    i admit sometimes i 'KK" did not stick to this advice. Then the effect was "chiat luck" lol.
    Must stick to rules of thumb or face the consequences.

    Actually there is another way by Jamie E Smith:-

    "HOW MUCH IS ENOUGH
    There are many different and contrasting views about whether it is better to invest a little and often, or invest larger sums occasionally. I think you should aim to do both differentially base on the state of the market at any given point. Once again, it is a matter for your personal judgment. Nobody can tell you or predict how you should behave in this context.
    Investing a little and often means that you limit your exposure to market fluctuations and therefore you manage risk. Investing aggressively when a special opportunity arises, such as Harley Davidson example, makes sense, so that the more you take advantage of a situation like that, the more your returns are likely to be if you get it right. So, in summary, invest a little and often, and invest heavily rarely and intelligently. Taking both approaches is the most likely to provide you with the best returns overall and in the long run".

    i think the latter sound more like Pyramid Up. Which is approved by more investment books' authors rather then pyramid down.

    ReplyDelete

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