Follow a preset selling rule for losing stocks; averaging down is not a recovery plan by itself
Investors tend to sell winners and hold losers. Seven years of records from 10,000 US accounts showed winning positions over 50% more likely to be sold, while investors more readily added to losers. The losers they retained then underperformed the winners sold by 3.4 percentage points over the next year.
What it takes
Free. Acknowledging and realizing a loss is emotionally difficult.
What you may gain
All transactions in 10,000 US discount-brokerage accounts during 1987–1993 showed a proportion of gains realized (PGR) of 0.148 versus losses realized (PLR) of 0.098, a 0.050 gap with t>35. On a daily basis, winners were over 50% more likely to be sold. Additional purchases occurred at a proportion of 0.135 for losers versus 0.094 for winners, t=19. Sold winners subsequently outperformed retained losers by 3.4 percentage points in one-year excess return relative to the market. An average-based example found that selling US$1,000 of a losing rather than winning position improved the subsequent year's return by about 4.4%, including the benefit of earlier loss-related tax deductions under US law.
Context & considerations
This concerns whether to sell, while avoiding frequent trading concerns unnecessary repetition; preset rules can reduce both indecision and trading. Averaging down does lower the arithmetic purchase price, but also increases exposure to the same stock; see concentration. The tax benefit is specifically American and does not transfer to China. These are 1980s–1990s US data; A-share costs and taxes differ. This is not investment advice.
Research & references
Odean T (1998). Are Investors Reluctant to Realize Their Losses? The Journal of Finance 53(5):1775-1798. https://doi.org/10.1111/0022-1082.00072