Averaging Up: Ride Your Winners
By Scott Chan
"Averaging down" is a common tactic for investors.
The concept is simple.
If a stock you own falls in price, you buy more. As a result, your overall cost basis in that stock falls.
It's human nature. If you liked a stock at $20, why wouldn't you buy more at $10?
Plus, averaging down also makes it easier to at least break even down the road.
The Trap of Averaging Down
Beware, though, because it could be a trap. This psychology is why many investors end up with big-time losing stocks that they refuse to sell.
They refuse to acknowledge that they may have been wrong about the stock. Before they know it, they are deep under water and the stock is "too cheap" for them to sell.
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