By Taylor Winn, Founder & President, Buckhead Wealth Management
One of the most uncomfortable parts of portfolio management is deciding whether to add to a position that is temporarily down. At first glance, it can feel counterintuitive to put more capital into something that has declined in price. In the right circumstances, however, adding selectively can be a disciplined way to manage risk and improve long-term portfolio outcomes.
The “Falling Knife” Problem
There is a well-known investing warning: don’t try to catch a falling knife. The point is simple: a lower price alone does not make an investment attractive.
If a business is fundamentally impaired — for example, if it is overloaded with debt, losing competitive position, or facing structural deterioration — adding more capital can increase risk rather than improve it. That is why we do not add to losing positions automatically or simply because they are down.
Before adding to a position, we ask two basic questions:
- What type of asset is this?
- What do the fundamentals look like?
For a broad index, sector ETF, or diversified basket, the risk profile is very different than for a single company. We also review the underlying fundamentals, including revenue trends, margins, balance sheet strength, and the company’s ability to withstand a downturn.
If the business remains sound and the decline appears tied more to sentiment, valuation compression, or sector rotation than to permanent impairment, additional buying may be reasonable as part of a broader risk-managed process.
Why Diversified Vehicles Are Different
Broad indices and sector ETFs typically carry less idiosyncratic risk than individual stocks because they are diversified across many holdings. That diversification does not eliminate risk, but it can reduce the chance that a single company failure destroys the entire investment.
When a diversified sector falls sharply while the broader market remains stronger, the decline may reflect changing investor preferences, rate sensitivity, or capital rotation rather than a permanent breakdown in the underlying theme.
In those situations, adding selectively can be a way to maintain exposure to long-term themes while improving the average entry price. Even then, position sizing matters. We still want each allocation to fit within the broader portfolio framework and risk budget.
Hard Limits for Individual Stocks
Individual stocks are different. A single company brings company-specific risks that cannot be diversified away, including management execution risk, product risk, regulatory risk, and balance sheet risk.
To manage that, we place strict limits on position size. In larger accounts, we generally keep individual stock exposure capped at a modest percentage of portfolio value. If a position is already at or above that threshold, we generally do not add more simply because the stock has declined.
If the position is below our internal limit, we may consider adding — but only after re-underwriting the business. That review usually starts with the balance sheet:
- Does the company have sufficient liquidity?
- Is debt manageable relative to cash flow and assets?
- Does the business still have the financial flexibility to operate through a downturn?
- Is management still allocating capital in a disciplined way?
If the answer is yes, a temporary decline may represent an opportunity. If not, we treat the weakness as a warning sign rather than a bargain.
Why This Discipline Matters
Averaging down without a framework can lead to bigger losses. But averaging down with limits, diversification, and fundamental review can be part of a disciplined portfolio process.
Our approach is designed to avoid emotional decision-making. We do not add blindly. We evaluate whether the decline is temporary or structural, size positions so no single mistake can derail the plan, and keep the portfolio aligned with long-term objectives.
The goal is not to be right every time. The goal is to manage risk thoughtfully, preserve flexibility, and take advantage of mispricing when the fundamentals support it.
Disclosure
Taylor Winn is Founder & President of Buckhead Wealth Management in Atlanta, GA. This material is provided for informational purposes only and is not intended as investment, tax, legal, or accounting advice. The views expressed are those of the author and do not necessarily reflect those of LPL Financial.
Investing involves risk, including possible loss of principal. Asset prices fluctuate, and no investment strategy can guarantee profits or prevent losses. Any discussion of adding to or averaging down in positions is for illustrative purposes only and should not be construed as a recommendation. Individual securities and sector funds carry different risks, including company-specific risk, sector risk, liquidity risk, and market risk.