Averaging down on housing

Discussion in 'Stocks' started by 220volt, Jul 18, 2007.

  1. 220volt


    I know lot of people shiver when they hear averaging down, but what do you all think using average down on housing index right now?
    That way you won't miss bottom.
    I know averaging down on individual stocks is a bad idea but for index should be pretty safe bet since it is very unlikley that will go all the way down, and housing WILL rebound sooner or later.

    Personally i am considering this optuion since i cannot think of a better time to do this , since everything seems very expensive now, except housing.

    Any suggestions, ideas are appreciated.
  2. This drag could go on for a LONG TIME so if you're planning on holding for a few years maybe it makes sense. If you're averaging down for the next 1-2 years you might be averaging down when you could just wait instead.
  3. 220volt


    But thats the whole point of averaging down, so you don't miss the bottom. If you wait you could miss very significant rally since biggest moves come right after bottom or at the top.

    And, yes this would be for the long term.
    At least 2 years.
  4. When a company goes private or merge with another, is the short force to cover.

    Some of the homebuilders have huge short interest. Could spark a short squeeze right?
  5. That makes no sense to me. Yes you will eventually be in at the bottom. but at what average cost if it takes another year for the bottom to finally be hit (if that short of a time period)? You basically have dead money until it turns around. V bottoms do happen, but they are rare. You have plenty of time to watch a stock or index consolidate before making a move.

    Many people increase their risk by trying to make a killing in the market by picking tops and bottoms. You can make great money in the middle of trends if you know when and where to buy or sell.
  6. 220volt


    Thanks for the replies.

    It is not as bad as you think.

    Lets follow Ryan Johns example from his money management book.
    Also, see bold at the bottom.

    The simplest definition to cost averaging is to add onto a losing
    position. There are exceptions, but this is the most common use of the
    method. For example Joe Trader invests $5,000 in a mutual fund at
    $17.00 per share. Most mutual funds allow fractional shares and
    therefore Joe Trader has 294.11 shares (provided there is no load). As
    time moves along (as it normally does), the price of the mutual fund
    slowly drops. Several months later, Joe Trader decides to invest an
    additional $5,000 into the fund at $14.80 per share. Because of the
    drop in price, Joe is able to purchase 337.83 shares of the fund with
    the second $5,000 investment. Joe now owns 631.94 shares of this
    mutual fund at an average cost of $15.82. Joe�s average price for each
    share of the mutual fund dropped from the original price of $17.00
    down to $15.82. Thus, the price of the mutual fund does not have to
    move back up to $17.00 for Joe to recoup the losses from the initial
    $5,000 investment, it only has to move up to $15.82.

    $15.82 avg. price x 631.94 shares = $9,997.29
    (if we carry the decimals further it will total $10,000)

    $10,000 total investedl631.94 total shares = $15.8242 avg. share price
    This can go on for a considerable time.

    If the share price of the
    fund continues to drop, Joe may have a plan to invest an additional to $12.00 per share, Joe will have invested as follows:

    $1,000 at $14.30 p/s = 69.93 shares Total shares = 701.87
    $1,000 at $13.80 p/s = 72.46 shares Total shares = 774.33
    $1,000 at $13.30 p/s = 75.19 shares Total shares = 849.52
    $1,000 at $12.80 p/s = 78.13 shares Total shares = 927.65
    $1,000 at $12.30 p/s = 81.30 shares Total shares = 1,008.95

    Joe now has $15,000 invested in this fund at an average cost of
    $14.87 per share. For Joe to recoup the losses, the fund has to move
    up to $14.87 per share. If the fund moves all the way back up to
    $17.00, then Joe will have profits of $2,152.15, or a 14.34 percent
    gain on his investment. If Joe did not cost average, the investment
    would simply be a breakeven.
  7. Wait until the first publically traded homebuilder goes bankrupt, then start averaging.
  8. Exactly. I can't respond to the averaging down mentality really...maybe because I'm so bearish on the housing industry it just seems like you might as well buy a good stock that will probably do well over the next 2 years. :D
  9. please avg down, i will thank you sometime late next yr :)
  10. If you agree that we had a real estate bubble, then please look at all previous bubbles to see how long it took to get back to the pre-bubble levels. In case of the nasdaq we are just past the 1/2 way mark after 7 years.

    If you don't think we had a building bubble then have at it.
    #10     Jul 18, 2007