Am i being irrational when i trade?
When i trade on my personal brokerage account, it reports the average cost of my purchased shares. I have this belief that I shouldn’t buy new shares at a price higher than the average cost of all my shares as that would drive up the average cost and therefore the returns that I would have earned would be lowered. is this logical or am i just being irrational?
Given that many engage in dividend reinvestment to buy more shares of the company with their issued dividends, surely this would decrease their realized returns as well if they were to sell off their position? Perhaps someone can use this to explain why it makes sense to buy into a company even though shares have gone up?
really appreciate it
bunp
I invest 5,000 in a company for xyz reason. Say I have returned 10% and I have cash left over in the company. I still like the company so I think returns will continue, why wouldn't I invest? Unless I thought there was a better opportunity or there was some portfolio concentration risk it would be better for me to get the returns I expect because I think there is upside with the company rather than zero prercent. You are obsessing over the individual position's return from a percentage standpoint rather than considering the returns of your portfolio
You’re considering expected returns vs. avg cost. Avg cost is misleading because you are comparing return profile of single investment vs cost profile of entire portfolio. At the expense of invoking micro theory, a better framework is looking at marginal cost rather than avg cost. Avg costs may go up but it is rational to consume another unit until the marginal cost is equal to marginal return. In your scenario, you should buy the stock as long as the expected return is greater than the cost of purchasing the stock (excluding opportunity cost)
Not the OP but not sure I understand fully the logic here. How can you apply a micro concept of profit maximization like MR=MC in a scenario when you have little ground to say what MR is, especially as a retail trader?
Also as to the point where you should look at marginal cost vs. average cost, isnt the dollar cost averaging strategy specifically targeted at ensuring a good average cost for your shares? I'd think its naive to not consider the effect of a share purchased on the entire portfolio.
Profit maximization is always the optimal strategy. OP's idea is to purchase shares only if MC<ac. for="" simplicity="" let="" say="" this="" is="" the="" cost="" minimizing="" strategy.="" op="" solving="" a="" constrained="" maximization="" problem="" by="" assuming="" away="" profits="" and="" side="" simple="" way="" to="" improve="" upon="" process="" consider="" looking="" at="" historical="" returns="" sector="" or="" stock="" characteristics="" does="" provide="" some="" footing="" estimating="" mr.="" may="" want="" buy="" techco="" even="" if="" its="" price="" all="" time="" highs="" tech="" outlook="" remains="" positive.="" decides="" assume="" return="" ac="" indeed="" rational.="" in="" employing="" however="" making="" calls="" on="" mkt="" timing.="" that="" case="" might="" as="" well="" forecasts="" when="" decisions.="" dollar="" averaging="" strategy="" philosophy="" invest="" consistently="" eliminate="" effect="" of="" market="" will="" not="" directly="" ensure="" low="" avg.="" cost.="" example="" was="" would="" actually="" have="" higher="" real="" distinction="" here="" whether="" wants="" not.="" index="" funds="" are="" go.="" yes="" utilize="" mr="MC" framework.=""></ac.>
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