Of the 30 shares that make up the Straits Times Index (SGX: ^STI), a dozen are lower now than they were three months ago. The unfortunate 12 include City Developments (SGX: C09), Golden Agri-Resources (SGX: E5H) and CapitaLand (SGX: C31). They are down between 7% and 15%.
At the other end, some 18 companies have managed to keep their heads above water. In fact, Thai Beverage (SGX: Y92) has done more than tread water. It’s the runaway leader with a gain of over 50%. A distant second is StarHub with a 10% rise.
If you hold a stock market winners then give yourself a well-deserved pat on the back. But what if you own a losing stock? What should you do? Should you average down, though some prefer to call it topping up?
Whichever way you want to look at it, when a share in your portfolio is trading substantially lower than when you bought it then the question of whether to buy more inevitably arises.
Buying more shares at a lower price will reduce your average holding cost. However, some believe that throwing good money after bad is seldom a good idea. That said, others see a lower price as an opportunity to buy more shares in company that might be undervalued. That’s because the stock market is imperfect. Consequently, fluctuations in share prices could have as much to do with the supply and demand of a share than some unrealistic valuation of a company.
But averaging down solely for the purpose of reducing your holding cost per share is never a good idea. It’s always a good idea to revisit the reasons for buying the shares initially and ask if anything has changed. There may have been some fundamental shift in the business environment or changes within the company itself.
Next decide whether you would consider buying shares in the company today if you hadn’t done so already. If you believe the market has undervalued the business, then thank your lucky stars for the buying opportunity. But remember that while you may have reduced the average loss per share, your actual loss has not changed.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.