When it comes to tracking the cost basis of your investments, there are several methods you can choose from. One of the most commonly used techniques is the average cost method. This approach allows you to calculate the average price at which you acquired a particular investment over time.
The average cost method works by taking into account all the purchases made for a specific security and dividing the total cost by the number of shares or units bought. This provides an average per-share price that can be used to determine gains or losses when selling some or all of your holdings.
One key advantage of using this method is its simplicity. It eliminates the need to track individual purchase prices and makes it easier to stay organized. Additionally, since it takes into account all purchases, it helps smooth out market fluctuations and provides a more accurate picture of overall performance.
However, one drawback of this method is that it may not accurately reflect recent market conditions if you’ve been holding an investment for a long time. For instance, if you purchased shares at higher prices in the past but subsequently bought more at lower prices during market downturns, your average cost may still appear high even though current values have dropped significantly.
Overall, using the average cost method for tracking your investments’ cost basis can be a convenient way to simplify record-keeping while still providing reasonably accurate information about your portfolio’s performance. However, keep in mind its limitations and consult with a financial advisor if necessary to ensure that it aligns with your specific investment goals and circumstances.