Top 4 mistakes which investors should avoid in a rising stock market

There is no better sight for stock market investors than seeing markets go high every day. A market rally augments wealth creation and propels returns.

However, in the euphoria, most investors get carried away and end up committing mistakes that can hamper wealth creation.

Just like it is crucial to take guard in a bear market, it is equally vital to avoid these common mistakes when markets are on the rise.

1) Investing in Bulk

In a bid to join the bull bandwagon, most investors end up investing in bulk in a rising market. They feel it is the right time to make some quick bucks.

However, you must avoid this approach and invest in a staggered manner, diversifying across asset classes.

However, if you want to invest in bulk, you can opt for balanced advantage funds.

These funds dynamically manage equity and debt as per the prevailing market conditions. Lower the equity exposure during market highs to cut losses and vice versa.

Instead of timing the market, your objective should be to remain committed to your investments for a long period.

2) Do not Exit Quality Stocks

In a rising market, valuations of quality stocks may seem overstretched. Most investors sell them and pour money into stocks trading at lower valuations. This mistake can prove detrimental to wealth creation in the long run.

Quality stocks create wealth and offer superior risk-adjusted returns. On the other hand, low valuation stocks find fresh investments difficult and fizzle out. Hence, if you have invested in fundamentally sound stocks, remain committed.

3) Avoid the Herd Mentality

Herd mentality is a common bias in stock market investing. This mentality becomes more prominent in the rising market. It is vital to avoid this bias as needs differ across individuals.

Look at your goals and do your research instead of pouring money into stocks everyone is chasing. Do not act under impulse, and do your homework carefully before committing. Seek help from a financial advisor if required.

4) Overestimate Your Risk Appetite

In a rising market, investors often end up overestimating their risk appetite. Even conservative investors tend to become aggressive and enhance their risk profile. Understand that a rising market does not materially change your risk tolerance.

If you are a conservative investor, you will get sleepless nights even at the slightest hint of volatility.

This could result in making flawed investment decisions and disbalance your asset allocation. Hence, keep your emotions under control and stick to your original risk tolerance.

The Final Word

The stock market movements are never linear. They oscillate between highs and lows. Being disciplined and looking at the big picture can help you make prudent decisions.

(The author is President & Head, Personal Wealth, Edelweiss Wealth Management)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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