10 Bull market blunders to avoid
Indian markets touched another milestone with Sensex touching 35K mark. Markets are on a roll due to variety of factors such as a stable and progressive government at the centre trying to bring long pending structural reforms in the economy, anticipation of an economic recovery around the corner, hope of manufacturing, agriculture, infrastructure sectors to come back to growth path in a big way resulting in more job creation, skill development and more disposable income at the hand of spenders, long pending reforms such as GST, RERA finally becoming a reality, crude oil under control for now and a relatively stable global environment in place to name a few. This market frenzy has resulted in retail investors investing every month via SIP mode in mutual funds and direct equity to achieve their respective financial goals. Slowly, money has started moving from traditional fixed instruments into the equity markets. Reduction in small saving scheme interest rates has also contributed to this shift.
While investing in equities, first-time investors must tread with caution, especially in a bull market at present where just about everything is going up. 35K, 40K, 30K, 25K are mere figures which investor should not relate to and not look at on a daily basis. What matters most is how is an investor’s portfolio (aligned with financial goals) is performing overall and if it on track or not to achieve your financial goals. With a bull market on at present, it normally catches frenzy of retail investors right at the very end. So it is always prudent to get the investment basics right and enter the market for the long haul but not before knowing the risks associated with the equity markets.
Similar to a bear market, a bull market brings with it its own set of challenges. There is a greater probability to do investment blunders during a bull market than during a bear market. Like we have a lot of do’s and don’t during the market downturn, we as investors should be well aware of the risks associated while investing in the bull market.
Moving your emergency fund into the equity markets – With every other stock (with or without strong fundamentals) moving up, it is always a temptation to move your emergency fund into the equity markets in hope of quick gains. We as investors must understand that emergency fund has a specific purpose and also cushions your long-term investments from an immediate need of money time to time for a variety of reasons. So make sure money intended for an emergency is not tinkered with at all and you don’t shift all bank balance from bank to equity markets haphazardly which you may repent big time afterward.
Buying in lumpsum mode: With the market in an uptrend, there’s always an urge to buy a huge quantity of stocks/mutual funds units in a lump sum mode. Investors should make sure even that in case of the lump sum amount available with an investor to invest (which he/she wants to channelize to equity markets for their long-term goals), you should strictly follow a Systematic Transfer Plan (STP) methodology for mutual funds rather than buying in a lump sum. For stocks too, it is prudent to buy stocks in small quantities in a staggered manner rather than buying in one go. An equity SIP in good quality stocks may not be a good option. Make sure you have a good understanding of the business before you invest in a particular stock.
Tinkering with your asset allocation – In a bull market, asset allocation holds lot more significance. During a bull market, equity portfolio tends to go up. Make sure that as an investor, one should keep a tab and rebalance the portfolio accordingly. Investors must not take investments out of debt instruments to invest in equity, hence having an even more lopsided asset allocation. In case market takes a sudden downturn, investors in such a case can find themselves in a catch-22 situation.
Buying low-quality businesses in hope of instant gains – A retail investor who invests in quality stocks for the long term or mutual funds via SIP mode must not try something fancy in a bull market frenzy. There’s always an outside temptation to buy some penny stocks in lieu of quick gains. Make sure you as an investor must not compromise on the quality at any given point in time as the quality of earnings tends to dictate stocks prices in the long term. A substantial investment and a wrong stock selection can be highly detrimental to your portfolio which otherwise may have been doing really well.
Investing based on tips: When the market is surging relentlessly, every other person has a stock tip ready. You as an investor should make sure you do your homework before investing in any financial instrument and not follow any stock advice blindly, as it’s your hard earned money. Invest in businesses you understand. Do remember – no one will compensate for your losses in equity markets.
Cluttering your stock/funds portfolio without much thought process: Make sure you don’t keep adding to your stocks portfolio or mutual funds without much thought process. In a bull market, every other stock looks promising. Make sure you don’t clutter your portfolio with too many stocks which makes it difficult to manage. Stay clear of sector funds, thematic funds if it doesn’t match your risk profile. Don’t move investments from large-cap funds, balanced funds to mid, small or micro-cap funds since they have done well in the recent past. Look for long-term returns, your portfolio composition, risk profile before tinkering with your portfolio in a big way.
Selling mutual fund investments to buy into direct equity – This is too dangerous and must not be practiced by retail investor without possible implications. A retail investor investing in equity markets in consistent, well-performing mutual funds via SIP mode for long-term goals is suddenly caught by direct equities bug since stock prices tend to be more buzzing and exciting than a fund NAV. Direct equity investing wherein you directly invest in stocks and investing in mutual funds wherein your funds are invested by a fund manager are both different universe of investment and one must not take any haphazard decision which may destroy good work done as a result of years of patience, discipline, persistence in investing.
Not starting SIP because markets are at an all-time high – As an investor, your goals should dictate your investments and not market indices. Markets will be volatile and no one can predict the market movement. So waiting for a particular market level is futile. Choosing a SIP mode and investing systematically every month will make sure you average your investments over time and don’t invest in one go. Best time to invest is now. In case you as an investor tend to increase your SIP by a specific percentage, please do that without any issues. Your investment philosophy should be consistent, irrespective of the phase, markets are in.
In a bull market, there is a left out feeling among many investors who have never invested in equities. Things get even worse if your friend/colleague talk about it and have made a killing out of it. It is a human psychology as to feel left out but as soon as you realize that investing in equities is required for your long-term goals, take a professional advise and start investing systematically for your goals.
Not weeding out underperformers and selling long-term outperformers in a bull run – Weeding out underperformers should be a top priority for an investor. Compare returns of your funds with peers in the same category and plan accordingly. Make sure you don’t sell good performers (for instance, a good, well performing large-cap fund) in your category by comparing it with a midcap fund as it’s about risk-adjusted returns and not simply returns. On the other hand, make sure you don’t shy away from selling out genuine underperformers. There have been instances wherein good strong businesses take a breather during a bull run. Make sure you have patience and persistence to hold on to jewels of your portfolio and not sell them in a hurry only to repent later.
Not keeping feet on the ground – Bull market rewards long-term investors who have been investing systematically in quality mutual funds or have bought and persisted with strong fundamental companies for years altogether. It is great to see our investments grow 2X,3X,10X and it’s a wonderful feeling. Having said that we as an investor must make sure we keep our feet on the ground and don’t get carried away with the success. We must remember that till we book profit, all profit or less is unrealized. So taking an eye off your investments or getting too excited about the success can make you complacent. Enjoy success in investing but don’t allow success go to your head.
As an investor, I am sure we all must be well versed with all above-mentioned points but its always good to have a reminder of key points which we as an investor must keep in mind. We must have our portfolio positioned in such a way that it can also bear the wrath of a severe market downturn and not just shine during a bull market. When we invest in any financial instrument, it’s our hard earned money which we are investing in anticipation that in the long term such investments will help us fulfill all our financial goals with ease. So while investing, we must trend with optimism, clarity, persistence, patience and don’t try something fancy which is not our DNA.
Do you have any such instance to share your investment journey? Do share in the comments section below much to the benefit of our readers.
Disclaimer: Above article is for investor education purpose only. This article is based on my experience with equity investing. There is no recommendation here for any financial product. Please consult your financial advisor before taking any financial decision. Mutual Fund investments are subject to market risks, read all scheme related document carefully before investing.