All Things Vu

I can tell you what not to do in a bear market – that is sell.  Why should I not sell everything and stop the bleeding?  Well, first of all the saying goes “Buy low, sell high”.  If you sell in a bear market you are doing the exact opposite, unless you got in long time ago at lower prices.  However, I doubt most people are in that situation.

For me now is a time to average down.  Averaging down is when I have shares at say $20 and now the stock is down to $10.  If I buy the exact same amount of shares then my cost for all my shares of the same company is now $15 ($20+$10 = $30 /2 = $15).  This way if the market recovers, which they always do, my stock has to climb back to $15 to break even and $15+ to profit, not $20 as before.

However, I would not recommend this if you don’t have the stomach for it.  The stock can go down even further like say bankrupt (WAMU, Lehman).  Both WAMU and Lehman Brothers were in the $40+ at the beginning of the year.  In those cases you would lose all the money you invested in the company.  I only average down if I believe the stock has been pushed down too far and that the stock will recover once the market picks up.

Not many people practice this because how do you put more money into something that is losing money almost everyday.  My thoughts are if you believe in the company then you are buying the stock on a discount.  When the fears are over the stock should rebound.  Timing is almost impossible so it’s best to just buy and wait.  Sometimes it could be a year, sometimes more.