Buying on the dip can be frustrating -- especially when you see the stock dip even further after you've bought it. To avoid that frustration, investors would do well to deploy a simplifying strategy for particularly risky investments.
One such strategy that can help reduce your risk is dollar-cost averaging. If you had implemented this tactic when buying shares of Novavax (NVAX) last year, it would have reduced your losses on the stock by 20%.
What is dollar-cost averaging?
With dollar-cost averaging, investors buy shares of a stock throughout the year rather than at a single point in time. For instance, say you were planning to invest $1,200 in Novavax last year. With dollar-cost averaging, you could have bought $100 worth of the stock at the start or end of each month. This takes the guesswork out of when to buy a stock and eliminates the temptation to time the market based on charts or patterns.
In short, dollar-cost averaging is a way to simplify your investment strategy. If the stock goes up, you're buying more of it as it rallies, and thus, earning a positive return along the way. If the stock struggles, then, yes, you're incurring losses -- but those losses average down as the share price falls. At the end of the year, your average cost on the stock is lower than if you had bought it at the start of the year.
How this strategy would have looked with Novavax
The chart below shows the stock price of Novavax as of the end of each month along with the running average that you would have achieved through dollar-cost averaging. The chart assumes you bought shares of the healthcare company at the end of each month, starting with Dec. 31, 2021.
Source: Yahoo Finance. Chart by author.
By the end of November 2022, after 12 months worth of purchases, Novavax's average share price would have been $38.46. That's considerably lower than the $143.07 that you would have paid to own the stock at the end of 2021. Shares of Novavax would go on to finish 2022 at just $10.28.
Had you put in a full $1,200 investment at the start of 2022, your shares at the end of the year would have been worth just $86. But with dollar-cost averaging, your end-of-year investment would be worth $321. That's an extra $235 on a $1,200 investment, or 20%.
Dollar-cost averaging won't prevent you from all losses on your investment. But it can be an effective way to minimize your risk on a stock, especially a volatile one like Novavax.
Is dollar-cost averaging still a good approach for Novavax this year?
Novavax was an especially risky stock at the start of 2022: Although the company produced a COVID-19 vaccine, it was late to the game and didn't obtain Emergency Use Authorization until the middle of the year. And it wasn't approved as a booster shot until fairly recently, in October 2022.
This year, that risk hasn't necessarily abated. Novavax and other COVID stocks could see declining booster shot demand, which might in turn lead to a significant drop in revenue. While Novavax does have Nanoflu and other products in its pipeline, it's still a fairly risky stock to be holding in your portfolio right now. Because of that risk, if you do plan to buy shares of Novavax in 2023, dollar-cost averaging remains a useful strategy.
