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Showing posts from December 20, 2009

Some do's and don'ts about Cost Averaging

One of the most common problems that many investors face is whether to
sell or to resort to cost averaging when the price of a stock, or the
NAV of a mutual fund, drops just after a purchase is made.

A typical question I face goes something like this: "I bought a stock
at 80, and when it dropped to 40 I bought some more to bring my
average cost price down to 60. Now the stock has dropped below 30.
Should I sell to reduce further losses, or buy some more to bring the
average cost down further, or just hold on till I get back my average
cost price of 60?"

There are no easy answers to such a question. The answers will depend
on the type of stock, the investor's risk tolerance and holding
period. So, instead of providing answers, let me try to list out some
do's and don'ts that can better prepare investors to face a similar
situation.

Do's about Cost Averaging

1. Before you pick any stock or fund, do a due-diligence. Find out
as much as you can about the track record of the pr…