India Fund Performance Compared to Index -Sensex(in %)
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Friday, April 17, 2009

Fallacy of bringing 'Averages Cost' down!!

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.

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

You can dollar cost average: $10*100
Stock X (average): $1,500
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!!