shrewd: 6 common mistakes to avoid in a rising stock market

The stock markets rose after four months of downward movement. The Nifty closed at 17,965 and Sensex closed at 60,326 on August 18, 2022.

Over the past month, the Nifty Midcap 100 is up around 10% while the Nifty Smallcap 100 is up around 7%.

The FIIs pumped out nearly 16,860 crore rupees (approximately US$2.1 billion) between August 1, 2022 and August 18, 2022.

Keep in mind that they withdrew 2,89,970 crore rupees (about US$36 billion) in this calendar year between January 2022 and July 2022.

According to our research, 42% of companies that have reported Q1 FY23 results so far have outperformed by beating street expectations.

Analysts expect the second half to improve as lower consumer inflation and lower commodity prices may ease pressure on margins. Easing inflation will encourage retail investors to remain optimistic about the economic recovery.

This positive rally doesn’t mean forgetting everything and letting the allure of high returns derail their plans by making mistakes that could frustrate their wealth-building efforts.

It is essential to maintain control when the markets are falling. It is even more crucial to do so when the markets are racing.

Avoid making these six common mistakes

Invest in bulk with FOMO

When markets are rising, investors experience fear of missing out (FOMO). These investors think it’s a good time to earn faster. Bulk investing is not the right approach to take. Instead, invest in ladders and diversify across asset classes to help achieve your financial goals. Consider staying invested for the longer term if wealth creation is the goal.

Release of quality stocks

In a rising market, good quality stocks may appear overvalued. Investors tend to sell these stocks and invest in stocks trading at lower valuations since the markets are rising. This can be a mistake and possibly hinder wealth creation. Some of the biggest wealth creators in the Indian stock markets have always been highly regarded due to the fact that they are multinationals or have highly credible promoters or benefit from increased free cash flow from year to year. So if you’ve invested in fundamentally sound stocks, don’t exit unless there’s something wrong with the company.

follow the herd

Herd mentality is a common investment bias that becomes more apparent when the market is skyrocketing. Consider financial goals and study stocks instead of investing based on expectations or Whatsapp advice. Don’t be impulsive; pause, research, understand if it meets the needs, then decide. Consider seeking advice from a financial advisor if necessary.

Ignoring your risk appetite and financial goals

Investments are based on risk appetite and financial goals. Investors can ignore risk when markets are up. Even risk-averse investors can believe in euphoria and disregard their risk profile. Investors should be aware of their ability to take risks and should not go overboard when investing. For example, one may be tempted to invest emergency funds or saved money to achieve a specific financial goal. For cautious investors, sleepless nights at the slightest hint of volatility may not be far away. This could mean making mistakes in investment decisions and unbalanced asset allocation.

Being influenced by popular personalities

Today, there is no shortage of popular individuals sharing their views on what stocks to buy or sell. They can offer stock recommendations on social media and messaging platforms. Some of them may not even have the relevant certifications. Therefore, one may want to be cautious when buying stocks based solely on the recommendations provided by these people.

One can also find renowned fund managers sharing their views on stocks or sectors that are likely to do well in a rising market. However, they might have completely different investment objectives and risk appetites that are not aligned with those of retail investors.

Focus on the next big theme or trend

Seasoned investors may be adept at changing their strategies and would be able to identify the next theme or trend that could benefit from a bull run. But retail investors would be advised to maintain a diversified profile unless guided by a credible investment adviser. For example, investors invested in IT and pharmaceutical stocks which rose as markets recovered from COVID-19. They believed that the exponential growth phase would continue. However, when the bull run gave way to corrections, they lost money. An investor should diversify and invest in companies that have prospects even when markets are high.

Remember that markets always work in cycles. Periods of volatility are followed by euphoric highs that can be shaken again by falling markets. An investor should ideally remain invested in fundamentally sound stocks throughout these economic cycles to create long-term wealth. Opportunities can be uncovered by thoroughly researching bull and bear markets.

(The author is Chief Investment Officer (CIO), Research & Ranking)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)

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