Averaging down is the act of contributing to your investment accounts on a regular and continuous basis.
It provides a structure for investing that removes emotion from your actions. It eliminates the need to “play the market.” No more timing the market. No more figuring out when to invest in specific funds or trends. No more listening to the media or the crisis of the day.
You construct a portfolio that is heavy in stock funds (60 to 100 percent: if you’re younger, more; if you’re older, less). In the Thrift Savings Plan, your C, S, and I funds are your stock funds. You want a portfolio specifically designed to follow the ups and downs of the stock market. Yes, you want to follow the market down.
You need a stock-heavy portfolio because 1) only stocks provide the necessary long-term returns to build wealth and, 2) stocks are volatile (up and down movements). For averaging down to work, volatility is essential.
As the stock market falls, your regular contributions buy greater numbers of ever-cheaper shares in your stock funds. The more cheap shares you buy, the lower the average share price of your total stock portfolio. The result is you break even and start to earn profits sooner as stocks eventually rebound from the bottom.
If you bought a share for a buck, then bought another share for 50 cents (as your paycheck contributions hit your account), your average share cost is 75 cents. You break even and show a profit sooner. In reality, you buy a lot of 50-cent shares because you are buying “on sale.” The result: lower average share costs, faster profits. You “buy low” by design.