handy: 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.

In the past month, the Nifty Midcap 100 is up about 10%, while the Nifty Smallcap 100 is up about 7 percent.

FIIs pumped nearly Rs 16,860 crores (about US$2.1 billion) between August 1, 2022 and August 18, 2022.

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Keep in mind that in this calendar year, they had raised Rs 2,89,970 crores (about $36 billion) between January 2022 and July 2022.

According to our research, 42% of companies that reported their first quarter 23 earnings to date have outperformed street expectations.

Analysts expect the second half of the year to improve on the back of the declining consumer inflation index and falling commodity prices that could ease pressure on margins. Declining inflation will encourage retail investors to remain optimistic about the economic recovery.

This positive rally does not mean forgetting everything and letting the allure of high yields derail their plans by making mistakes that could put a brake on their wealth creation efforts.

It is vital to keep an eye on when the markets are falling. It is even more important to do it when the markets are soaring.

Don’t Make These Six Common Mistakes

Invest in bulk thanks to FOMO

When the markets rise, investors experience a fear of missing out (FOMO). Such investors believe that it is the right time to earn some quicker. Bulk investing is not the right approach to take. Instead, invest and diversify across asset classes to help meet financial goals. One should consider staying invested for the longer term if wealth creation is the goal.

Leaving Quality Stocks

In a rising market, good quality stocks can appear overvalued. Investors tend to sell such stocks and invest in stocks that trade at lower valuations as markets rise. This can be a mistake and ultimately hinder wealth creation. Some of the greatest creators of wealth in the Indian stock markets have always been highly valued because they are MNCs or have highly credible promoters or enjoy an increase in free cash flows year after year. So if you’ve invested in fundamentally healthy stocks, don’t get out unless there’s something inherently wrong with the company.

Follow the herd

Herd mentality is a common investment bias that becomes more apparent when the market rises. Think about the financial goals and study the stocks instead of investing based on Whatsapp forwards or tips. Don’t be impulsive; pause, examine, understand if it fits the needs and then decide. If necessary, consider seeking advice from a financial advisor.

Ignoring your risk appetite and financial goals

Investments are based on risk appetite and financial goals. Investors can ignore risks when markets are rising. Even risk-averse investors can believe in the euphoria and ignore their risk profile. Investors should be aware of their risk-taking abilities and should not go overboard when investing. For example, one may be tempted to invest his emergency money or saved money to achieve a certain financial goal. For cautious investors, sleepless nights at the slightest volatility may not be far away. It can mean making mistakes in investment decisions and throwing asset allocation off balance.

Being influenced by popular individuals

Today, there is no shortage of popular individuals sharing their views on which stocks to buy or sell. They may offer stock recommendations through social media and messaging platforms. Some of them may not even have the relevant certifications. Therefore, one can be cautious when buying stocks only on the basis of recommendations from such persons.

You can also find reputable fund managers sharing their views on stocks or sectors that are sure to do well in a rising market. However, they may have completely different investment objectives and risk appetite that are not in line with those of retail investors.

Focusing on the next big theme or trend

Seasoned investors may be adept at changing their strategies and should be able to identify the next theme or trend that could benefit from a bull run. But retail investors are advised to maintain a diversified profile unless they are guided by a credible investment advisor. For example, investors invested in IT and Pharma stocks that grew 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 with prospects, even when the markets are high.

Remember that markets always perform in cycles. Periods of volatility are followed by euphoric highs that can in turn be affected by falling markets. Ideally, an investor should remain invested in fundamentally strong stocks throughout these business cycles to create long-term wealth. Opportunities can be discovered by doing thorough research in both bull and bear markets.

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

(Disclaimer: The experts’ recommendations, suggestions, views and opinions are their own. They do not represent the views of Economic Times)

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