Question

Dollar cost averaging is a popular method of investing for many individuals. Many others, however, believing that this is a method of "doubling down" on position that is working against you. What are your thoughts about dollar cost averaging?

Answer 1

Dollar cost averaging is a strategy in which an investor places a fixed dollar amount into a given in investment (usually common stock or equity shares) on a regular basis. The investment generally takes place each and every month regardless of what is occurring in the financial markets. As a result, when the price of a given investment rises, the investor will be able to purchase fewer shares. When the price of a particular security declines, the investor will be able to purchase more shares.

For Example you buy shares for $1000 in Jan at 20 per share means you bought 50 shares and In feb you again bought for $1000 at $25 per share so you bought 40 shares(1000/25). And again in march you bought for $1000 at $40 per share so you bought 25 shares so in total you invested $3000 at an average cost of ( 3000/115= 26.0869 Per share).

Why it matters so much because It's an attractive option for investors who want to contribute to their investment portfolios on a regular basis.

Views on Doubling down your position

Doubling down means averaging when share prices are continuously falling because of market conditions like recession or trade wars that time is it wise to average your position at lower rates or not that is something we need to understand.

Certain investors believe that if you were willing to buy the stock at a higher level, why not buy more now. Others feel that all investments should be closed after an adverse move and that you should never add to a losing trade. Where do I fall in this argument? Somewhere in the middle.

If you believe in the quality and value of your research, averaging down into a losing trade makes perfect sense. However, the dangers are obvious. Some of the legendary investment failures ­- Long Term Capital, Nick Leeson – involved averaging down into losing trades. Closer to home, anyone who blindly averaged down into Fannie Mae, Lehman Brothers or AIG has seen bad trades turn worse. With such large risks in averaging down, how do we decide when to cut losses and when to push our luck?

I feel if outlook of markets are positive in the longer run as after 2008 recession general outlook of the markets were positive so many people averaged their positions at lower rates and brought down their average cost and thus in the next 2-3 years when markets rose across the globe they all made good profits so I personally feel doubling down your position that is working against you is a good way of reducing your average cost and thus making profits in the longer run most mutual funds do like this only.