NEW YORK (TheStreet) — Want to know a guaranteed way to win in a casino? Walk up to a roulette table and bet $10 on red. If you lose, bet $20, and if you lose again bet $40, and then $80, $160, $320, $640, $1280 . . . . This betting strategy is known as a Martingale betting system and unfortunately we see people use variations of a Martingale system all too often when investing.
Adding to losing positions to “average down” almost always comes too close to a Martingale to avoid the eventual loss that will happen sooner or later. The real evil with an averaging down method for most people is it gives a false sense of success from the many “wins” this system normally generates. People buy homeowners insurance for the same reason: It’s the big loss that destroys years’ of wealth building.
A Martingale system may work well in theory, but it doesn’t work well in practice. Averaging down in gold during a bear market is the wrong approach under current conditions. …
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