I have a somewhat different take on averaging up or down. My rules are:
1. No more than 150 % invested in portfolio (all my available equity plus 50 % borrowed). No less than 50 % invested (half my available equity, no borrowing)
2. I use various indicators to help me decide how much I want invested in equities (between 50 % and 150 %). This decision drives the need to be a net purchaser or seller. Of course the performance of the portfolio also drives this need - if the portfolio is rising and I'm 150% targeted then I need to make additional purchases to maintain that 150 % and vice versa.
3. Target 20 securities with no more than 15 % (but preferably 10 %) of invested capital in any one security.
4. So as a particular security rises several things can occur: (1) the % in that security rises above the 10 - 15 % limit and I sell some, with the proceeds being redeployed (may result in averaging up or down on other securities) (2) the security's price rises to a point where it looks far less attractive going forward than other portfolio holdings or other potential additions, so money is redeployed (may result in averaging down or up on other holdings). To accomplish this redeployment, I have to continually assess the relative attractiveness of each of my holdings and of a number of other stocks on my watchlist (prior holdings and other stocks). For example I have recently rotated monies between RURL, PRFT and XWG - when XWG was peeking, PRFT was rebounding and so monies went that way, then as XWG was correcting RURL was peaking and monies went that way. Now all three are relatively high so monies have been moved in DWSN, a stock on my watchlist for some time.
Convoluted perhaps and yes I sometimes get out of winners too soon but my portfolio is up 145 % since Aug 16th of 04.
