Investors never average down, they say yes to dips but no averaging down! This lesson explains how and why investors never average down but sell loser to buy more winners.
Wealth Building Portfolio Management, lesson 4, explains why superior investors never average down but sell loser to buy winners for the most favorable portfolio returns. Links at the end guide you to related lessons if you want to learn more.
What’s in this lesson for me?
Never averaging down is one the most valuable skills of superior investors. Investors sell losers and buy more winners to improve their portfolio returns. The lesson explains how and why this important strategy works.
Do not play high risk odds, investors never average down…but buy the dip!
We have looked at both successful rides through price dips and price drops that happened without any sign of significant recovery. Averaging down on some dips would have worked well. The problem comes when averaging down does not work.
Get it wrong and you have to deal with a very costly mistake. Sometimes stocks do fall in a hole and never climb out. Sometimes a stock ridden down never recovers. Stocks die.
Yes to dips but no averaging down!
Even when there is a price recovery it can take years for averaging down to work. In the meantime that money is effectively dead. Putting it to productive work elsewhere pays off absolutely every time. That move guarantees the odds are in your favor.
To recap, if the economy is positive and the market is positive we then turn to examining each specific company. If there are no substantive negative facts we stay in through price dips. If the facts are substantive and negative, we immediately sell. Take the loss and get the funds to work making us more money in a growing stock.
We do not and can not know it all. Ever. Things happen, things change. Even when ready and willing to ride through a dip, it can have a bad outcome. Significant negative news can instantly change the picture. At times circumstances definitely change. We get surprised. We have it wrong. Our prudent choice, we immediately sell.
Investors change teams not average down
One of the great things about the stock market is our ability to change teams. When we know we are on the wrong or losing side we can change teams. Sell the loser and buy the winner.
Averaging down significantly increases risk. Should we be wrong on an averaged down decision, we kill our performance. It goes beyond the single stock involved. Getting an average down move wrong can devastate other investment returns or even destroy your portfolio.
Far better odds favor our overall portfolio performance by passing on the average down strategy. In most cases, even when averaging down works in the case of a single stock there is a negative effect on the portfolio.
Averaging down always impairs overall portfolio performance. This happens because more of your always scarce resources are going into a weak position. Using the alternate or opposite strategy of putting the resources into your strong position disproportionately increases your portfolio performance. When that is possible who wants an impaired portfolio?
Take the averaging down strategy out of your investment management toolkit. That will improve your portfolio performance odds. Then you can accelerate our portfolio. That certainly beats being another averaged down under performing investor.
Why this lesson matters
Learning to never average down adopts a valuable strategy of a superior investor. Selling losers to buy more winners immediately improves returns for investors. Any investor adopting this strategy improves their returns.
Key take away points from lesson 4,
Investors never average down:
Investors never average down, they say yes to dips but no averaging down! The lesson explains how and why investors never average down but sell losers to buy more winners.
- Investors learn to buy dips but never average down.
- When change devalues an investment – sell it.
- Winning investors always buy the winning team and sell losers.
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Wealth Building Portfolio Management lessons:
Introduction to portfolio management Lesson 1
Pyramid portfolio wealth building Lesson 2
How investors buy dips Lesson 3
Distracted investing misses profits Lesson 4
Investors never average down Lesson 5
Market patterns repeat repeat repeat Lesson 6
Research confirms investment counts matter Lesson 7
Portfolio measurements to size positions Lesson 8
Growth protects investing profits Lesson 9
Winston Churchill said crisis = opportunity Lesson 10
Weeding your investment portfolio Lesson 11
Next lesson 6:
Research confirms investment counts matter
Have a prosperous investor day!
Bryan
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