What is averaging down?
Averaging down means buying more of an investment after its price has fallen, which lowers the average purchase price of the whole position. It is often presented as a way to recover faster: the price needed to break even falls with each new purchase. But it also increases the money invested in something that has just gone down — which is only a good idea if the reason for the fall is temporary.
What it does to the average price
After buying shares at a price and more at a lower price , the average purchase price is:
The break-even price — at which the whole position shows neither gain nor loss — is this average, not the original purchase price.
A simple illustration
100 shares are bought at €50. The price falls to €30, and another 100 shares are bought:
The position now breaks even at €40 instead of €50: a rise of 33% from €30 instead of 67%. But the amount invested has grown from €5,000 to €8,000, and the outcome depends entirely on what the price does next:
| Without averaging down | With averaging down | |
|---|---|---|
| Shares held | 100 | 200 |
| Amount invested | €5,000 | €8,000 |
| Break-even price | €50 | €40 |
| Result if the price falls to €15 | −€3,500 | −€5,000 |
| Result if the price recovers to €50 | €0 | +€2,000 |
When it can make sense
- Broad, diversified investments, such as a world index fund, which recover with the market as a whole. Buying more of them in a downturn is part of rebalancing and of continuing a savings plan.
- A fall caused by the whole market rather than by the company, while the reasons for owning the investment are unchanged.
- Within a planned position size, where the extra purchase does not push the investment beyond its intended weight in the portfolio.
When it becomes a risk
- Single companies in real trouble can keep falling or never recover; averaging down puts more money into a failing investment.
- Anchoring: the original purchase price is irrelevant to the investment's future. The only question is whether it is worth buying at today's price.
- Growing concentration: repeated averaging down can turn a small position into one of the largest in the portfolio, just when it has shown the most risk.
A useful test: would someone who had never owned the investment buy it at today's price, in this size?
A worked example
Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.
Am I adding to winners or averaging down on losers?
I show more additions than sells: since 2019-03-01 you made 23 buys vs 6 sells, and total cash/market inflows (ex‑dividends) were 94.564,87 €.
Top recipients of your net inflows
| Asset | Transactions (count) | Net inflow (€) |
|---|---|---|
| Vanguard FTSE All-World UCITS ETF | 30 | +9.765,00 € |
| Microsoft Corp. | 28 | +2.360,00 € |
| Coca Cola Co. | 19 | +2.785,20 € |
What this means for your activity
- Your net flows are concentrated into core ETFs and large holdings (see table).
- Your realized trade history shows 6 closed trades with a win rate of 33,33% (2 winners, 4 losers).
- You also hold cash of 8.000,00 €.
- The numbers indicate you have been adding to core positions more often than cutting them, but the data shows where inflows landed, not whether each addition was made as a winner or as averaging down.
Related topics
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