Averaging Down Can Hurt Your Portfolio

I like the saying "Everybody likes getting a stock cheaply and then seeing it go up, racking up big gains."  This is not only the issue for newbie even professionals suffer quite a lot.
You want cheap but valuable.  Everyone think the same.  Reality is


http://biz.yahoo.com/ibd/070531/investoreducation.html?.v=1
Investor's Business Daily
Investor Education: Averaging Down Can Hurt Your Portfolio
Thursday May 31, 7:00 pm ET
Marie Beerens

Everybody likes getting a stock cheaply and then seeing it go up, racking up big gains.
But how one goes about getting in at a low price can make a big difference in whether it will be a successful investment.
 
Many investors think that they can lower their average cost basis by buying shares of a declining stock. They reason that when the stock price rebounds, they will profit from being early investors.

Nothing is further from the truth. Averaging down is not a wise strategy. You risk accumulating serious losses and weighting your portfolio down with a few big losers.

When a stock falls, you never know how deep it will go. The stock may very well never regain its original price level. Meanwhile, you're throwing your good money after bad investments.

Not only are you accumulating more losses, you also are not taking advantage of potentially lucrative stocks. That is called opportunity cost. It can cost you dearly, especially in a bull market.

Why try to chase losers, when you have all the tools at your disposal to select winning stocks?

Pick a stock that has solid earnings and sales growth, strong institutional support and industry peers, and strong price performance.

Target top-rated stocks nearing sound buy points. By waiting until a stock traces a sound base, you will make sure all the weak holders will be shaken out.

Then, when the market has very few sellers left, new institutional buyers will come in and push the price higher. That is when you should be buying the stock.

Arrhythmia Research (AMEX:HRT - News) went through three declines (point 1) before finally tracing the right side of its base. Investors who bought shares on the way down (point )in those declining periods would have seen the stock carve lower lows -- costing them big money.