Should You "Buy in Thirds"?

Let's say you want to invest in a company. Should you buy now? Should you wait for a correction? Will that correction ever come? What if the stock goes way up tomorrow and never comes back to today's price, even with a correction? I don't know the answers.

Buying in Thirds is a way to shift some risk around. If you want to invest $1500 in a company, buy $500 worth of shares today, $500 more a few months from now, and $500 a few more months after that.

Risk is not created or destroyed, but spread around differently. You avoid some of the risk of buying now, only to see the price go down. But you gain some risk of not buying it all now, only to see the price go up later. If the price does go down, you can buy your next batch at the lower price. If the price does go up, well at least you got your foot in the door at the lower price.

You are adding "time diversification" to your portfolio by buying the same company at different prices over time, sort of (but not exactly) like dollar cost averaging.

If you are wavering over whether to buy or not, buying in thirds also helps you ease into your ownership position instead of having to make an all-or-none decision today. In the long run, repeated over many stocks over many years and through full market cycles, the risk and luck should even out.

Arguably, things also even out at the big-picture portfolio level if you buy every stock all at once, and there's debate among investors about whether "time diversification" is a fallacy. Buying in thirds can still be useful, even if you view it as mostly an effort to control your emotions and manage cognitive biases.

Secondly and equally importantly, depending on how much cash you have on hand and whether you're regularly adding cash to your portfolio, buying in thirds is a good way to slowly establish larger positions in stocks when you don't have all the cash up front. It's useful as a way to get stock diversification in your portfolio earlier in the process of portfolio building. Keep your "third" purchases big enough that your commissions don't end up as a significant part of the cost of the stocks though. If your brokerage charges $4.95 commissions now, you could buy my hypothetical $500 worth of a stock and the commission would only be 1%, which is reasonable to me (many people say 2% is fine too).

Here's another longer discussion about "buying in thirds" from Stock Market School.