Marc Cuniberti: Averaging risk over time
Submitted to The Union
Averaging in on stock purchases is a tactic that allows investors to profit from rising stocks but helps prevent losses during market routs or other unforeseen events. Averaging in simply means you buy stocks slowly over an extended period of time and not go “all in” on one particular day.
Suppose you want to own XYZ stock and plan to buy a certain dollar amount for your portfolio. Instead of buying it all at once, you buy a third now, wait a few months, buy another third and then wait some more and make the final buy farther down the road.
Now you have bought XYZ stock in three blocks over many months, or even years if you’re a patient investor. You paid three different prices for the stock as you bought at three different times.
How does averaging in help an investor?
After you bought the first block, if the stock went up, you’re happy because you made money but if the stock went down you are also happy you didn’t go all in.
Averaging in can assure the investor his attitude is a positive one regardless of which way the stock went after each buy. If the stock continues up you make even more money. But if the stock falls after a buy in, your next buy allows you to buy even more of the stock because its price is lower.
Averaging in also helps prevent against a black swan event, in which an unforeseen event can occur at any time that may or may not be related to the stock or overall market. Think of a 9/11 type event, where, had you bought all in the day before, the sudden shock to the markets would have caused your investment to immediately lose money as the world recoiled from such an event.
Averaging in can help prevent sudden and stomach churning losses by such unforeseen events and make buying a stock and the price you pay more of a smooth transition into an investment.
Next time you want to decide to buy a stock, try buying it over an extended period of time in several separate buys and you might find it’s a heck of lot less of an anxiety producing event and a lot less trying on your psyche.
This article expresses the opinions of Marc Cuniberti. He hosts “Money Matters” on KVMR FM 89.5 and 105.1 FM at noon Thursdays and is syndicated on more than 35 radio stations throughout the U.S. and Canada. His website is http://www.moneymanagementradio.com.
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