Posted On Wednesday, Jun 25, 2014
With the BJP government coming to power with a clear majority, many market experts believe that India is on the verge of a long term bull market. Therefore making money in a bull market is as easy as taking candy from a baby right? Time to give that concept a second thought… many times investors fail to get the returns they deserve because they fall prey to some common mistakes while investing in bull markets.
Here are 5 common equity investing mistakes to avoid during bull markets:
1. Trying to time the markets:
Investors generally face long odds in trying to time the ups and downs of the market. Most of them are not able to spot a bull market when it is taking off. When the market runs up significantly, they realize that they have missed the bus. Timing the market is difficult and requires financial expertise. Even the so called market experts may not get their timing right. We believe investments should be goal based, not timing based. Always set your investment goals and invest for the long term. Market timings do not matter if you have a long time horizon.
2. Ignoring asset allocation:
In bull markets hot stocks are always in news. Investors get enticed to buy these stocks and invest all their money in them without paying attention to the golden rule of investment i.e. asset allocation. Asset allocation is the process of diversifying investments among several asset classes i.e. equity, debt and gold to reduce investment risk. Its objective is to lower investment risk by reducing over-reliance on one asset class. But most investors however do not realize that portfolio return is directly attributable to asset allocation. Therefore, as an investor, you need to make sure that you properly allocate your hard earned money in different asset classes in order to fulfill your investment objective.
3. Following sentiments, not fundamentals:
In a bull market, investors tend to ignore the fundamentals and focus more on market sentiments. By fundamentals we mean the business of the company, its management and long term goals, the environment in which it operates and its investment process. Short-term market movements are driven by sentiments but long-term returns by fundamentals. Therefore, use fundamentals to make investment decisions and ignore the market noise.
4. Redeeming in market rallies – the other end of the spectrum:
In a bull market, stock markets rise sharply. An expected reaction to this might be to redeem all holdings in equities. Many investors overwhelmed and cash out during the market rally. But by cashing out during bull market, investors are compromising on their long term financial goals. Therefore, rather than taking any short term measures, investors should keep on holding to their investments till their financial goal is achieved.
5. Hanging on to underperforming funds:
While investors should have a long time horizon for their investments, they should make sure not to hang on to underperforming funds. Investors should monitor their investments on a regular basis and if a fund is underperforming over a longer time and has incurred loss then it’s better to exit from that fund. Even if this entails booking losses, investors should not hesitate in exiting underperforming funds instead waiting to earn profits out of it and ultimately incur more losses.
Investors should avoid these common mistakes while investing in a bull market. Equity investments are essentially long term investments. By selecting good process driven mutual funds, and remaining invested in them over a long period of time, investors can create wealth in the long term by leveraging benefits of compounding. However we strongly suggest you to consult with your financial advisor before proceeding with any investment decision.
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