If you’re like most people investing in the stock market today, chances are you’ve lost some value in your portfolio due to economic recessions. However, those of us who invest for the long term tend to benefit more dramatically in times such as these. Recessions are just one of the ways in which casual investors can beat Wall Street gurus.
So what is the concept of Cost Basis Investing? Simply put, it’s the idea that a consistent reduction in the cost of an asset will produce greater gains rather than diversification alone. We all know that diversification can be a fine line, and many of us tend to over-do it. That’s why cost basis reduction may benefit you more than just finding new stocks to put your money into. Reducing the cost of a stock involves a consistent injection of capital until you personally feel satisfied as to the cost per share level you have brought it down to. Even if a stock is trading at a 10% loss compared to when you purchased it, within a short time you can turn that loss into a gain simply by being disciplined with your investing.
Many investors try to make up for losses by investing in different stocks that are currently trending, yet they don’t understand that there can be more risk in that approach. Even putting your money into cyclical stocks at that time won’t produce timely gains. Cost basis investing is one of the methods by which you can steadily see gains produced, and losses reduced, especially if your stocks pay dividends. Re-investing those dividends can be a wise move in recession times, as opportunities for incredibly cheap stocks begin to emerge. A cautionary note not to be taken lightly is that emerging market stocks may not be the best ones to use cost basis investing in recessions. If volatility is still very high, you may not want to risk that extra cash in overseas investments.
In conclusion, if you’re interested in recovering from your stock losses, cost basis investing provides a great way to get you back in the game, and will produce greater benefits the longer you stay in your stocks.