6 Big Mistakes to Avoid in a Rising Stock Market

Risk comes from not knowing what you’re doing,” Warren Buffet.

In the last few years, several short and long-term economic policies have led to extraordinary inflows in the Indian stock markets. Consequently, the markets have been witnessing an extended bull run.

Even during such times, investors make mistakes that hamper their prospects and overall returns. Let us look at some of these:

  • Focusing too Much on Timing and too Little on Goal Planning

The universally accepted truth about markets is that the ‘time in the market’ is more important than ‘timing the market’.

Especially during a rising market, some investors try to predict the market movements and wait for certain levels. However, instead of being fixated by the levels, one should look at the absolute returns. If the portfolio has met your goals, you should contemplate booking profits.

On the other hand, if your goals are long-term, you should not be bothered by the immediate market movements. Have a plan, and do not deviate unless your goals have changed.

  • Ignoring Asset Allocation

It is common for investors to be lured into stocks or investment ideas that are trending. They invest in these even when the script might not conform to their investment goals and risk appetite. For example, if you are a conservative investor, you should not venture into (or at least limit your exposure to) risky avenues like small-caps and mid-caps.

  • Confusing Historical Returns With Future Expectations

While history does repeat itself, it goes against investment prudence to formulate future expectation based wholly on historical data. Note that your average holding period might not be long enough to match the period of the historical average.

Moreover, the same set of micro and macro circumstances, product life cycle, and competitive scenario might no longer exist. Hence, it is highly unlikely that past performance will be repeated in the future.

  • Relying Too Much On Midcaps

Small and mid-caps, are fundamentally high-risk – high-return investment ideas. They often offer extraordinary returns. However, they generally take the biggest hits when the market tanks. Moving into midcap stocks with weak fundamentals might lead to degradation of investor wealth.

Comparatively, large caps are safer avenues with proven track records and offer stability with consistent long-term growth.

  • Too Much Focus on Economic Data

During a bull run, markets are cluttered by various news, expert views, and insights about the future. Investors often get confused due to these overwhelming (and often contrasting) inputs.

Advisors must educate their clients that as long as their goals and objectives are being met, they should not be influenced by such news. They must highlight the importance of being committed to long-term investment strategy rather than responding to frequent market changes.

  • Panicking or Overbuying During Market Corrections

Bull runs are often characterized by intermittent sessions of consolidation and profit booking, that drag the markets down. Investors should not panic and exit potentially good stocks during these sharp falls and down events.

Corrections might also lure an investor to enter the market and make up for lost opportunities. This could backfire if the investment idea has already played out. For most investors, a sound long-term investment strategy is more beneficial than being reactive.

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