Follow-On vs. Averaging Down: When Should You Double-Down on a Losing Investment?

Every cricket match has its turning points. In some cases, there are times when a team is forced to follow on after a dismal first innings.

In the world of investing, when your portfolio takes a hit, you face a similar decision: should you double down — or, in other words, average down — on a losing investment?

Doubling down is a bold move where you buy more shares at a lower price to reduce your average cost, provided that the underlying fundamentals remain intact.

The answer isn’t black and white. It requires a clear strategy, careful analysis, and the right tools at your disposal.

Follow-on: A Calculated Risk for a Comeback

Imagine you’re the captain of a winning team in a test match. Your team has posted a massive first-innings total, giving you a commanding lead.

With that advantage, you decide to enforce the follow-on, forcing the opposition to bat again. This decision, though a clear sign of your dominance, isn’t taken lightly. It is a calculated risk that could either push the opposition into further collapse or, if underestimated, allow them to stage an unexpected comeback.

In investing, doubling down on a losing investment is much the same. Doubling down is a move that demands confidence in your analysis and the conviction that the dip is temporary, with the underlying fundamentals remaining intact.

Double-Down Only When Fundamentals are Sound

When considering whether to double down, one key aspect is to understand why the stock’s price has fallen. Has it hit a temporary snag due to market overreaction, or is there a deeper, fundamental issue at play?

Averaging down works best when you are convinced that the fundamentals are sound. In these scenarios, buying more shares at a lower price reduces your average cost and sets the stage for future gains when the market corrects itself.

In such situations, the Margin Trading Facility on the Angel One app (with which you can Buy Now and Pay Later), gives you access to additional funds.

With margin trading, you can quickly double down when you identify a temporary mispricing in the market. It’s like giving your batting order a quick second wind, providing the extra firepower needed to challenge the opposition’s lead.

Of course, caution is crucial here. Using margin amplifies both gains and losses, so a robust risk management plan must always be in place.

Making a Comeback: Cut Losses With Diversification

Another powerful tool in your arsenal is diversification. This can be an important play when you realize that a stock is collapsing due to shifting fundamentals.

Diversification is crucial in a follow-on. As a captain, you have the advantage of foresight when it comes to the losses you might have suffered, but you cannot expect the same results without changing your strategy.

Diversification is a corrective action that can rescue you in a follow-on. With the Basket Order feature on Angel One, you can place multiple orders at once to activate this strategy, effectively diversifying your position when a key stock in the portfolio is undergoing a downturn.

Now, you’re spreading risk and positioning your overall portfolio for a balanced recovery—much like a well-constructed batting lineup that adapts to changing conditions.

Second Innings: The Art of Rebuilding

After a follow-on, the losing team’s second innings are crucial. With renewed focus, the team carefully rebuilds its batting order, consolidating its lead while minimizing risks.

In investing, your second inning begins after you’ve doubled down. You reassess your portfolio, trim exposure to persistently underperforming assets, and strengthen your core holdings.

This phase is about stabilizing your position and preparing for the market’s eventual rebound. It’s a time for thoughtful adjustments and strategic consolidation. It bolsters your future gains.

Moving Ahead After a Follow-On

Successful investors know that the market’s ups and downs are an inherent part of the game.

Just as a team endures unsuccessful innings and then rallies back with renewed determination, an investor must have the resilience to weather losses and the insight to capitalize on opportunities.

Equipped with features like Margin Trading, Basket Orders, and investor support from SEBI through Smart ODR, you can navigate challenging times with your strategic acumen.

At the end of the day, averaging down is about seizing a moment when the market overreacts – taking a calculated risk based on sound fundamentals and positioning yourself for a turnaround.

The decision should be grounded in thorough analysis, a clear understanding of risk, and the confidence to trust your strategy.

Embrace the challenge, learn from every downturn, and remember: in the game of investing, every setback is simply an opportunity to refine your strategy, gather momentum, and ultimately turn the tables in your favor.

By being prepared and using the right tools, you can transform a losing investment into the starting point for a remarkable comeback.

Disclaimer: This blog has been written exclusively for educational purposes. http://bit.ly/usSGoH