When the market drops 15% or 20%, most people's instinct is to sell. Mine is the opposite: I check how much extra money I can put in.
It's not bravery, and it's not some special talent for calling the bottom. It's arithmetic. When you buy at a lower price, your average cost per share goes down, which means you need less of a recovery to get back to breakeven.
What average cost is, and why it matters
Your average cost is simply how much, on average, each share or fund unit has cost you across all your purchases over time. If you bought at 100, then at 80, then at 75, your average isn't the simple mean of those three numbers — it's weighted by how much you invested in each purchase.
This is exactly what makes an average cost calculator useful: it tells you, using your real numbers, at what price you get back to breakeven. And that number is usually lower than people assume, because every purchase made during a dip weighs proportionally more of the cheaper price.
My approach: keep buying when everything drops
When I started investing, my first instinct during a downturn was to wait: "let's see if it drops further so I can buy at the bottom." The problem is nobody knows where the bottom is until it's already behind you.
So I changed strategy: an automatic monthly contribution, no matter what. And if I have some extra money available when the market is clearly cheaper than it was a few months earlier, I put that in too.
I'm not trying to nail the exact bottom. I'm trying to buy at a lower average price than I would if I'd waited for things to calm down.
An example with numbers
Say you contribute €300 a month to an index fund:
- Month 1, price 100: you buy 3 units
- Month 2, drops to 80: you buy 3.75 units
- Month 3, drops further to 70: you buy 4.29 units
With the same monthly contribution, you buy more units during the dip. When the price returns to 100, the units bought at 70 and 80 are already generating a gain, even while your overall average cost stays below 100.
That's what takes the fear out of a downturn once you look at it this way. You're not losing money on the purchases you make during it — you're buying cheap.
What I don't do
I don't sell existing positions to "wait for it to drop more" and buy back in later. That's trying to time the market, and I already tried that early on as an investor: it doesn't work well, not even for people who do this professionally.
I also don't dump all my extra cash into a single dip at once. I'd rather spread it across several contributions while the drop lasts, in case it keeps falling.
The dip isn't the enemy
If your horizon is long (10, 20, 30 years) and you keep contributing regularly, downturns stop being a threat and become an opportunity to buy cheaper. The average cost you build during those bad months is often what drives the best long-term returns.
Next time the market drops sharply, before panicking, calculate what would happen to your average cost if you keep contributing. You might be surprised how quickly your position recovers once the market turns back up.