Think Twice Before You Average Down Your Current Stock Positions

As the Philippine Stock Exchange (PSE) logs the worst falls in trading history of its listed stocks amidst the coronavirus pandemic, some local investors have been taking advantage of buying blue-chip stocks at big discounts, hence an opportunity to average down current stock positions.

TODAY, I’ll try to shed light on averaging down and how it can be your next practical investment strategy while local stocks are traded at such bargain prices.

ONCE AGAIN, investing in stocks, though promises high returns, also poses high risks, not only of financial losses but even psychological stress. You are but advised to invest only what you can afford to lose and always do prior research.

Averaging Down as an Investment Strategy. Averaging down has been around alongside the stock market investment and viewed by many as a cost-effective approach to accumulate returns. It entails bringing the stock positions closer and closer to the breakeven points by acquiring more and more shares at lower prices.

One can never use a compass without holding it flat on a steady, outspread palm. We never had this whole thing before. Let's be more patient and considerate of others. @signedMARCO

— signed MARCO (@signedMARCO) May 20, 2020

[1] In other words, stock investors do the averaging down by investing additional amounts in stocks as soon as there is a significant decline in the stock price against that of the original acquisition, hence reducing its current portfolio average price.

[2] Stock investors who employ averaging down strategy are those with long-term investment goals and believe that the acquired stocks promise returns and price appreciations at least in the future, if not very soon.

[3] In reality, this strategy comes with a fifty-fifty investment potential, either make bigger returns after stock rebounds or bigger losses after continuous declines and extended price stagnations.

[4] Averaging down works best with blue-chip stocks (like ALI, JFC, SMPH) that have proven track records to withstand the market swings, impressive financial health, and other fundamental advantages.

[5] Inexperienced or beginning stock investors can always and easily do the averaging down of their current positions without dealing much with the daunting fundamental and technical analyses.

[6] With regular peso-cost averaging approach, stock investors can ride out the market fluctuations and stay stress-free from all the dips and rallies.

Averaging Down Versus Averaging Up. Averaging down means buying more shares when the market price is down. On the other hand, averaging up is buying more even when the price has already gone up.

Local Blue-Chip Stocks Worth Buying. As Investopedia explains, blue-chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth.

[1] Jollibee Foods Corporation (JFC). As the world’s largest Asia-based and founded fast food company, its core business involves the development, operation, and franchising of its quick-service restaurant brands. It has acquired some of its competitors in the fast food industry in the Philippines and abroad such as Chowking, Greenwich Pizza, Red Ribbon, and Mang Inasal.

[2] Ayala Corporation (AC). It is the country’s oldest and largest conglomerate that has a portfolio of diverse business interests including investments in retail, education, real estate, banking, telecommunications, water infrastructure, renewable energy, electronics, information technology, automotive, healthcare, and business process outsourcing.

[3] SM Prime Holdings, Inc. (SMPH). An integrated property developer and a subsidiary of SM Investments Corporation, its primary sources of revenues include rental income from its chain of malls and food courts, cinema ticket sales, and other amusement-related operations.

[4] BDO Unibank, Inc. (BDO).  In terms of total assets, it is the largest bank in the Philippines, fifteenth largest in Southeast Asia, 116th in Asia, and 234th globally (2016). It provides products and services to the retail and corporate markets including lending, deposits, foreign exchange, brokering, trust and investments, credit cards, corporate cash management, and remittances.

[5] Metro Pacific Investments Corporation (MPI). A leading infrastructure holding company with a diverse set of assets held through our operating companies engaged in the provision of water, sanitation, sewerage services, real estate, and infrastructure projects, and hospital operations.

[6] San Miguel Corporation (SMC). It is a multinational and the Philippine’s largest conglomerate in terms of revenue engaged in manufacturing of consumer products such as beverages and processed meat, and in fuel, oil, power generation, and infrastructure.

What Experts Say About Averaging Down. Before you do the averaging down of your current stock positions, consider these pieces of expert advice which I culled out from the highly credible sources on the web.

[1] If you buy more and more stock as the price falls, because you believe the evidence that this stock was fundamentally overvalued and has turned sour, you are not averaging down — you are throwing away good money after bad (Adrian Holliday, Capital).

[2] Investment experts caution against averaging down unless prospects for a stock rebound are high, and the reason for the original decline was irrational (John Csiszar, The Nest).

[3] If your goal is to make money on the trade and you have no real interest in the underlying company other than how it might be affected by market, news, or economic changes, then averaging down is likely not the right strategy for you (Kenn Little, The Balance).

[4] Investors use phrases like averaging down to justify their reckless actions of not only holding onto a losing position but adding to them (Al Hill, TradingSim).

[5] Overall market weakness could be another good reason. If the entire market takes a dive and pushes your stock prices down with it, it could be a good idea to buy even more of your favorite long-term investments at a discount (Matthew Frankel, The Motley Fool).

[6] The key in averaging down is to have enough confidence in the stocks you want to buy. Carefully do your homework before you start to buy (Charlie Tian, GuruFocus).