Equity Market Investments: Mistakes in Bull Markets – Axis Direct
May 14, 2018 | Source: www.advisorkhoj.com
Common Mistakes in Bullish Stock Market
1.Trying to time investments at the start of a bull market:
Retail investors wait too long trying to time the market. Most retail investors are not able to spot a bull market when it is taking off. When the market runs up significantly, retail investors realize that they have missed the bus. Timing the market is incredibly difficult. Even experienced professional investors often do not get their timing correct. Investing should be goal based, not timing based. Set investment goals and invest for the long term. Timing does not matter if you have a long time horizon.
2. Ignoring asset allocation:
In bull markets hot stocks and mutual funds are always in news. It is important to select great stocks or mutual funds to get higher returns. But investors do not realize that a much bigger portion of portfolio return is attributable to asset allocation and only small portion of returns can be attributed to stock or mutual funds selection. For example, even if you select a great mutual fund that gives you 25% compounded annual returns, if 90% of your portfolio is invested in fixed income assets yielding 6% post tax returns, your overall portfolio returns is less than 7%. You should pay more attention to your asset allocation and consult with your financial adviser to get appropriate guidance on the right asset allocation mix.
3.Adopting trading strategies in bull markets:
Investors should understand the difference between trading and investing. Traders are usually professionals and aim to generate profit over a short time horizon, ranging from a day to a few weeks. Investors, on the other hand, aim to create wealth by investing over a long time horizon. Trading and investing require very different strategies. Retail investors in bull markets, seeing market rise sharply, switch to trading strategies. Investors may even be able to make decent intraday or positional trading profits in bull markets. But investors should not think that they are expert traders just because they have made trading profits. Trading is extremely technical in nature and requires considerable expertise and experience which most retail investors do not have. Investors should especially avoid taking leveraged positions using derivatives like futures and options because they can incur big financial losses, if the market or the stock moves in the opposite direction of their trade.
4.Turning off SIPs during a downturn:
Successful investors have made money in the market by buying stocks when everyone else was selling. Retail investors often find it difficult to handle volatile markets and stop the Systematic Investment Plan payments during a market downturn. This is a mistake. SIPs enable the investors to buy equities at a low cost in market downturns. SIPs work on the principle of “Rupee cost averaging”. By investing a fixed amount, every month or at any other regular frequency you can buy more units when the prices are low and less units when the prices are high. SIPs ensure good return on your investment and help you meet your long term investment objectives.