Embarking on a journey through a bull market may seem like an effortless path to financial success. However, the reality is that many investors find themselves stumbling due to three common behavioural mistakes. In this blog, we’ll shed light on these pitfalls and provide practical solutions to help you navigate bull markets more effectively.
Behaviour Mistake 1: Panic Selling at All-Time Highs
Whenever markets hit an all-time high, it’s normal to feel uncomfortable and think they may fall. You remember the adage ‘Buy Low, Sell High’, and are tempted to sell and get back in later post a market fall.
But, here is why this may be a bad idea!
All-time highs are a normal and inevitable part of long-term equity investing. Without all-time highs, equity markets cannot grow and generate returns.
Imagine this. If you expect Indian equities to grow at say 12% per annum (in line with your earnings growth expectation), then mathematically it means the index will roughly double in the next 6 years, become 4X in the next 12 years, and 10X in the next 20 years.
In other words, the index will inevitably have to hit and surpass several all-time highs over time if it has to grow as per your expectations.
In fact, for the last 23+ years, the average 1Y returns, when invested in Nifty 50 TRI during an all-time high, is ~14%!
So ‘all-time highs’ in isolation don’t imply a market fall and in fact, the majority of times, market returns have been strong post an all-time high.
What should you do at all-time highs?
Solution: Stick to your asset allocation and rebalance your equity allocation if it deviates more than 5% from the original allocation.
The first trap investors often fall into during bull markets is panic selling when the markets reach all-time highs. The fear of a potential downturn prompts hasty decisions, contradicting the age-old wisdom of “Buy Low, Sell High.” Understanding that all-time highs are a natural part of long-term equity investing is crucial.
To combat this mistake, adhere to your asset allocation strategy and consider rebalancing if your equity allocation deviates more than 5% from the original plan. History shows that all-time highs do not necessarily precede market falls, and staying the course can lead to robust returns over time.
Behavioural Mistake 2: Procrastination in Deploying New Money
When faced with the opportunity to invest new capital during an already bullish market, the temptation to time the market becomes pronounced. Procrastinating and waiting for a potential correction can result in significant opportunity losses over the long term.
To mitigate this mistake, establish a rule-based framework for deploying new money. This may involve a combination of lump-sum and staggered investments over 3-6 months, depending on market valuations. Avoid falling into the trap of trying to anticipate corrections, as the cost of missed opportunities can accumulate and impact your long-term outcomes.
Behavioural Mistake 3: Panic Buying
In a bull market, investors often attempt market timing by delaying new investments, and anticipating a market correction. However, the market may surprise them by continuing to rise. When investors eventually give in, they might compensate for missed upside by taking excessive risks, deviating from their original asset allocation.
The solution lies in resisting the temptation to take excessive risks. Stick to your original asset allocation and be vigilant for signs of a bubble market, such as insane valuations, euphoric sentiments, and media frenzy. Avoid chasing recent performers or making impulsive sector bets, and remain disciplined in your investment approach.
Conclusion:
While bull markets present opportunities, avoiding behavioural pitfalls is crucial for long-term success. By steering clear of panic selling at all-time highs, mitigating procrastination in deploying new money, and resisting the urge to panic buy, investors can navigate bull markets with greater confidence. Remember, a disciplined and well-thought-out investment strategy is your best ally in both bull and bear markets.
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