What are the mistakes done by investors in stock market boom?
When the bulls dominate and elevate the market to new high levels, more often than not rationality also goes out the window and investors get carried away . In this blog, let us discuss 5 such mistakes investors make in a stock market boom and how they can steer clear of them.
5 Mistakes done by investors in bullish stock market
1. Changing Risk Profile
Often when all is hunky dory and markets are in a state of euphoria, investors tend to enhance their risk profile. For example say from conservative to moderate, aggressive to more aggressive and so on. What an investor must understand is that changing risk profiles does not change their respective risk appetite i.e. their ability to take on risk. An act like this throws the investors asset allocation off balance thereby putting their financial plans and goals in jeopardy.
Investors should be prudently watchful and vigilant ensuring that they are not manipulated by market noise. Investors should at all times keep their emotions in check and stick to their risk profile.
2. Recency Bias
Recency bias is a cognitive bias that favors recent events over historic ones. Frequently investors are accustomed to giving greater importance to the most recent event and forgetting the events in the past.
A simple way of overcoming the recency bias is to always keep the big picture in mind, whether it is stocks or mutual funds. Investors should maintain caution and recall the words of the sage of Omaha Warren Buffet –
“Be fearful when others are greedy. Be greedy when others are fearful.”
3. Putting a stop to regular investments (SIP)
During Bullish markets investors tend to terminate their SIPs, simply looking at the meager returns in the short term. An investor should keep in mind that the premier objective of a SIP is accumulation. A by-product of accumulation is the returns. Investors shouldn’t chase returns , rather focus on accumulating wealth and feel happy about it. Be patient and the returns will follow. The same is also applicable in times of bear markets.
4. Lump Sum Investments
Investors should refrain from making lump sum investments when the markets trade at all-time highs as it may result in poor returns. Instead investors should invest that lump sum amount in a staggered and disciplined manner through SIPs over a tenure of 24-36 months. Even in a bearish environment one should continue investing in their high conviction ideas in a staggered manner at different levels, this helps in securing a decent average price.
5. Buying stocks which are at 52-week low
When the markets are breaking barriers with rising optimism and touching new highs investors should keep away from the stocks that trade at their 52 week lows. A stock at its 52 week low is not an indication of it being undervalued or available at a relatively cheaper price in comparison to peers. Investors should not be lured in by such situations and must avoid these tactics.