Don’t Fall for This Huge Investing Lie…
Brokers and financial advisors have been giving you one of the most god-awful pieces of advice. Most folks believe it—and unfortunately, investors like you have lost millions of dollars because of it.
Today you’re going to learn how to avoid that hideous mistake. I’ll also show you a simple trick that’ll limit your losses and let you make more money on your profitable trades.
The Wall Street lie I’m referring to is commonly called averaging down. It means buying additional shares of a stock when the price drops. The idea is that you can lower the average price you pay for shares. Because if you liked a stock at $50, you’ll love it at $35, right?
See, in most cases, averaging down really means spiraling down…
Let’s say you buy 1,000 shares of a $10 stock. It’s a company that owns a small fast-food chain. Your research shows the company’s planning to double its number of restaurants from 50 to 100 over the next three years. So you put $10,000 on the line, expecting shares to rise as the company expands.
Unfortunately, the expansion doesn’t exactly go as planned. The economy softens. Sales weaken at existing stores. The company’s margins are pinched as consumers crack down on spending and demand larger discounts. Finally, an earnings miss sends shares plummeting double-digits in one day.
It’s been one year since you first purchased your 1,000 shares. Now your $10 stock is trading at $5 and your $10,000 initial investment is now only worth $5,000. But you still like the stock. You believe the company will right the ship when economic conditions improve.
You decide to buy another 1,000 shares, paying just $5 per share this time. You can easily justify the move. By purchasing another 1,000 at a discount, you’ve effectively lowered your average entry price to $7.50 per share.
You’re doing what every financial advisor tells you to do here. Sit on your hands and stick to your belief that the stock will eventually go up…
But that’s not how the market works. Averaging down is throwing good money after bad. In fact, it’s usually a sucker’s bet. Instead of improving your situation, you’re tying up even more money in a losing investment. Using our example, your stock would still need to double to get back to your original buy price. And that’s after you’ve already doubled-down on your investment. That’s money you could have put to use on other trades.
The lie of averaging down only causes pain and suffering. For every rare occasion when it works you get ten flops.
It’s time to break the cycle by going against what nearly every financial advisor has preached since the beginning of time. Instead of buying more shares of a stock when the price drops, you should average up.
Instead of throwing money at your losers, you should add to your winning positions. It’s not crazy. After all, why wouldn’t you want to buy a stock that’s going up?
Take a look:
I know this might sound strange. But it’s a strategy that many successful traders and investors have used for decades (even though it’s rarely mentioned).
If you have reason to believe a trend will continue, you can add to your winning position multiple times. Just be sure to limit your risk by moving up your stop loss each time. That way, you won’t lose money if the stock unexpectedly drops below your most recent purchase price.
Averaging up works for two key reasons. First, you’re actively building a position in a winning stock. Instead of idly watching your gains, you’re increasing your profits by moving additional money to your strongest positions.
You’re also making your money work for you on your own terms. When you buy into the lie of averaging down, you’re forced to expand your investing timeframe. One year becomes three years. Three years become five years. Before you know it, you’re holding an investment for half a decade. You’ve pulled out whatever’s left of your hair waiting for the damn thing to break even.
Averaging up breaks this cycle of disappointment. And it’s not rocket science. If you average up consistently you’ll be rewarded with larger, faster gains.
You’ll never throw good money after bad again.