When given the opportunity to average down in a position that I own and want more of I'll normally take the chance when it's the best opportunity available. Averaging down gives you a chance to lower your cost basis in a company that you have already deemed investment worthy.
Most often the chance to average down comes after some negative news for the company, whether it's a macro-economic issue or company specific issue, such as a recent earnings miss. Averaging down in a position does require monitoring. You need to know if something has changed fundamentally with the company or if it's just market noise currently voting against the company. This is why it's important to devote some time each week to every one of your holdings to get the latest news in an attempt to discern if the price movement is justified. Once I feel comfortable that nothing of note has changed, then it's time to purchase shares to average your cost basis down.
One of the biggest things that I struggle with as far as averaging down is what price to aim for. Typically I try and get a 2.5% to 5% pullback before purchasing more shares, however sometimes you just don't get the chance for that big of a pullback. I know there's been a few times where I missed the opportunity to lower my cost basis because I was looking for a certain percentage lower and that price just narrowly missed. I've also thought of aiming for a 1% decrease in the average cost basis once the new shares are added. I continue to go back and forth on this issue for what method to use, although I guess it should be more company specific because some companies have much larger swings than others.
What are your thoughts? Do you prefer to have a target percentage decrease from the original cost basis or target a decrease in the total cost basis with the new shares purchased or buy if it's the best opportunity even if it's just a little less than your purchase price?