Self Directed Investment Tips – The Controversy of Averaging Up and Averaging Down

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.