Averaging Down

Investing more in a position after its price has fallen, lowering the average cost per share.

Example

Adding 50,000 to a struggling startup at a lower price than the original investment.

Important

A lower average cost does not improve the company's prospects, and in early-stage investing a lower price often reflects a higher chance of failure.

Related terms

  • Sunk cost fallacy — Continuing to commit money, time or attention to a position because of what you have already put in, rather than because of what it is now worth.
  • Down Round — A financing round priced at a lower valuation, or lower price per share, than the company's previous round.
  • Expected value — The average outcome of a decision if you could repeat it many times: each possible result multiplied by its probability, all added together.

Lessons that explain it

  • Adding to winners at higher prices often beats rescuing losers at lower ones — Follow-on capital usually has a better expected result in companies with strong evidence, even at higher prices, than in struggling companies at lower prices - though the right choice always depends on the specific evidence. (11 min)

All 578 terms in the Investing glossary