Top 4 mistakes investors should avoid in a rising stock market

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There’s no better sight for stock market investors than seeing the markets go up every day. A market rally increases wealth creation and propels returns.

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

Just as it is crucial to be cautious in a bear market, it is equally essential to avoid these common mistakes when the markets are rising.

1) Invest in bulk

In an effort to join the bullish movement, most investors end up investing heavily in a rising market. They think it’s a good time to make a quick buck.

However, you should avoid this approach and invest in a laddered fashion, 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 based on prevailing market conditions. Reduce equity exposure during market highs to reduce losses and vice versa.

Instead of timing the market, your goal should be to stay committed to your investments for a long time.

2) Don’t quit quality stocks

In a rising market, valuations for quality stocks may seem overdone. Most investors sell them and pour money into stocks trading at lower valuations. This mistake can prove detrimental to long-term wealth creation.

Quality stocks create wealth and offer superior risk-adjusted returns. On the other hand, low valuation stocks are finding new investments difficult and are running out of steam. So if you’ve invested in fundamentally sound stocks, stay committed.

3) Avoid the herd mentality

The herd mentality is a common bias in stock market investing. This mentality becomes more important in the rising market. It is essential to avoid this bias because the needs differ from one individual to another.

Examine your goals and do your research instead of pouring money into actions that everyone else is chasing. Don’t act on impulse and do your homework before you commit. Seek the help of a financial adviser if necessary.

4) Overestimate your risk appetite

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

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

This could lead to erroneous investment decisions and unbalance your asset allocation. Therefore, keep your emotions in check and stick to your initial risk tolerance.

The last word

Stock market movements are never linear. They oscillate between highs and lows. Being disciplined and seeing the big picture can help you make prudent decisions.

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

(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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