How to Average Up

By Timothy Lutts, Chief Investment Strategist and Chief Analyst, Cabot Stock of the Month Report

Buying more of your best stocks, also called averaging up or pyramiding, is something most great investors through the years have practiced. However, like any tool, it can also be dangerous if misused.

The most important key is to buy smaller and smaller amounts on the way up—hence the term pyramiding, which obviously starts out with a wide bottom (your initial purchase) and gets narrower and narrower toward the top (your follow-up buys). Averaging up in this fashion ensures that your average cost doesn't run up too fast, yet allows you to funnel more money into a potential big winner.

Some investors prefer to average up any time the stock rises a certain amount from their previous purchase price, while others like to wait for specific chart set-ups. There is no one right way to do it, just be sure that whatever strategy you employ, it works for you—you'll be heavily invested in some stocks using this method, which means the upside and downside will be sharper.

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