Among today’s investors there is so much controversy; is averaging up or down is right, or is it the wrong thing to do? If a situation arises where you have the opportunity knocking will you average up or down? I will give some pros and cons of both of these issues.Averaging Up: Averaging up is when you increase your position in the same stock after you are already in a winning position. Done properly, averaging up can significantly increase gains within your portfolio. A good reason for averaging up on a winner may be to increase your Book Value so when you do profit take there will be less gains that will be taxable. This investment strategy would generally be used to increase your position over the longer term. Life is grand as long as the stock continues to increase.On the down side, it is very difficult to identify the point at which you should add to your position. If you add too large of a second position and the stock falls back a few points, you may move from a winning position to one of a loss. A safer way to average up would be to make many smaller position additions over time, this will make a pull back of a few points more tolerable.Averaging Down: Averaging down is sometimes very difficult to stay away from. I use the term “sitting on my hands” so I will not jump into a further position when it is losing already. Averaging down is speculative but can be very rewarding if you are lucky. You must watch that you do not invest in the stock that continues to go lower and never recovers. Keep your mind fresh and use good judgment at all times before averaging down.It is not wise to use margin, funds you cannot afford to lose or funds that you will need to have access to in the near future. Each investor has their own risk and reward tolerances and prior to investing it is strongly recommended to have stop loss and profit taking policies in place.These are just a few pros and cons of averaging. It can work for you, but can also work against you. Invest smart and never invest all your finances to average up or down in a position.
Investing is a difficult game with huge rewards if you get things right, and huge losses if you get them wrong. Despite what others may make you believe, investing is less risky than you may perceive. If you take the right precautionary steps, you can easily avoid most newbie mistakes that may lead to losses.So what are the things you should be wary of when you enter the investment game?First of all, you should take advantage of opportunities whenever they present themselves. As a newbie, you may be guilty of sitting on the fence too long and not investing soon enough. By the time the average newbie actually gets around to investing in an opportunity, it has long been sucked dry by other investors.This also means that you should start investing early in your life. Don’t wait until you are 40 to start investing; the sooner you begin the better. Any money that you can set aside should be invested wisely. The sooner you start investing, the sooner you start seeing gains. Moreover, if you invest early in life, you have the chance to recover from mistakes before you hit retirement age.Next, while you should be wary of opportunities, you should be a bit bold in your investments. Many people tend to invest only a small portion of their savings into stocks or options and put the rest into a savings account where it accrues little interest. By being a bit more aggressive in your investment strategy, you could mutliply your returns ten fold.When it comes to investment, remember that there are no real experts. You may read up reams upon reams of research on the markets, spend hours reading investment magazines, or follow the wisdom of gurus, in the end, you will have to follow your gut instinct. Following the herd mentality will mostly give you low returns. Remember Warren Buffet’s oft-quoted formula: “be fearful when others are greedy, and greedy when others are fearful”.Finally, make sure that you diversify your investments. You don’t want to wake up one day and find all your life savings gone because you invested in a dead beat stock. Invest in multiple stocks, and multiple financial instruments to even out your financial risk.