Stock in Lloyds Banking Group (LSE: LLOY) is one of the most traded on the FTSE 100 index. It has a large following from retail investors like me, as well as larger institutional investors. Such a large amount of activity, however, doesn’t guarantee the share price will always go up. Over the past year, the Lloyds share price is down 45%. Only 10 members of the FTSE 100 registered a worse performance over this period. As someone who has held shares in Lloyds during this price fall, I’ve finally made up my mind on what to do going forward.
Averaging in
Like many investors, I don’t go all in on a single stock, or on a single day. If there’s a stock I believe could perform well in the long term, I’m happy to average in over time. This is the case for the Lloyds share price. I invested a tranche at 37p several months ago, which I wrote about here. Now, I’m waiting for 25p in order to buy in again.Â
The process of averaging in essentially allows me to get a better blended buying rate over a period of time. I have a portion at 37p, and hopefully soon another portion at 25p. Should the share price continue to fall, I’ll likely have funds for one more tranche at a lower level. If I can buy at 25p, then it reduces my average buy-in price to 31p. This allows me to achieve a lower price overall than just investing everything in one go.
Why wait for the Lloyds share price to fall?
I could simply buy more stock now, with the Lloyds share price trading around 27p. Unfortunately, I think the share price could easily fall further, for several reasons. First, the backdrop is not supportive for the business model at present. The news that the UK has entered a recession is bad for banks, as consumers typically tighten up spending habits. Added to this is a reduction in new loan issuance, which is a high profit area for banks.
Second, Lloyds has a large retail arm. This retail arm exposes it to a larger slump in revenues, compared to banks such as HSBC and Barclays, that have large trading and investment banking arms to cushion the retail arm.Â
Finally, mid-year results showed a pre-tax loss of £602m, and I struggle to see what is going to change through to the end of the year. If anything, we could see interest rates cut down to 0% as is being speculated. This would further erode the net interest rate premium that Lloyds receives as a bank.Â
Therefore, waiting for a further potential fall could help me buy in at a lower level, and reduce my average buying price.
Patience for long-term profits
Despite the negativity mentioned above, I do believe that Lloyds is a fundamentally sound business with a good balance sheet. So looking out to the long term, I’m not worried about the Lloyds share price staying at current depressed levels. That’s why if we do see another slump down to 25p, I’m going to be buying!