@Stephen – I’ve done upwards averaging myself. Most of the time I have not regretted it, but of course like everything else – I’ve made mistakes in this too.

The only time it might make sense is during a bull market, in a good stock, after short term pullbacks to technical support (usually the 20 or 30 day moving average). In that case, you’ll be averaging up NOT down. Those pullbacks are good entries that institutional traders use to add to their positions. Let them drive the price and you can just go along for the ride.

It’s not necessarily that bad to buy a stock that has gone down. If someone is willing to sell it to you for less than its worth you should take it before they realize this, and if you’re willing to buy another stock for more than it’s worth that doesn’t automatically mean it will go up.

In fact, the reverse is usually true. Although a share in a company is only worth what someone will pay for it, the actual value can’t possibly change as much as the price does. This means that sometimes the price is too high and sometimes it’s too low – if it’s risen rapidly there’s a very good chance that it’s too high (or just high enough that you’re already paying full price for the better earnings so it’s not an advantage).