George Varghese's  Instablog

George Varghese
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I am George Varghese. My passion includes investments and reading. I believe value investment philosophies make most sense and that it will work on our advantage over time. I have been investing own money for past couple of years both in US and in Indian markets. I publsh my portfolio... More
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Valuable Investments
  • Fallacy of 'Bringing Averages Cost Down' !!  0 comments
    Jun 5, 2009 12:39 PM

     

      I am sure you also have heard the reasoning "I have been investing in stock X to bring down my average cost" over and over. So I am planning to write about my thoughts on it.

      Is this a rational reasoning for an investment? I don't think so. I believe that every dollar an investor invests is "fresh" money and when that "fresh money" is invested, we should look and find the best investment available at that point of time. As an investor the primary objective should be to find best value available.

      The right reason for dollar cost averaging must be if the stock you are trying to cost average is the best available investment when making that investment. I think many people keep investing so that they can see that their average is coming down and they feel good seeing that their 'looses' have reduced.

    E.g:
    Stock X (current price): $10 * 100 = $1000
    (average cost) : $20 * 100 = $2000

    You can dollar cost average: $10*100
    Stock X (average): $1,500
    OR
    You can find the best investment option available (Stock Y): $1,000

      Yes, now you may feel good that my investment in Stock X is better than it was before, average now is only $15, from $20. But from this point all it matters is how stock X or the Stock Y performs.

      So my point is, don't invest money to bring down the cost. Invest in the best option available, that could be same stocks or different or may be not even stocks!! If you are not holding the best investments currently, you should get out of it, let alone add more to it!!

    You can also find this article at my Blog: georgevargheseonline.com

     

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