Investor Beware: 5 Costly Mistakes to Evade in a Rising Stock Market

When things are going good, risk management goes on the back burner. In fact “Risk” does not get the importance as it gets in the downtimes. 

This is the result of a Behavior anomaly called Recency Bias. Recency bias is the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events. Recency bias often misleads us to believe that recent events can give us an indication of how the future will unfold.As a result, we ignore important information that can affect our judgment in various contexts, such as performance appraisals, financial decisions, or relationships. 

In Investing, Clients display recency bias when they make decisions based on recent events, expecting that those events will continue into the future. It can lead them to make irrational decisions, such as following a hot investment trend or selling securities during a market downturn. It can also lead to overconfidence.

Know: How to prepare yourself for Next Stock Market Fall ?

In the book Same as ever, Morgan housel in one of the chapters wrote: Risk is what you don’t See. The Biggest Risk is always what no one sees coming, because if no one sees it coming, no one’s prepared for it; and if no one’s prepared for it , its damage will be amplified when it arrives.

I am seeing this happening around when investors these days want to invest in each and every thing which promises them high returns. They are over exposed to specific sectors, Asset classes and are not shy to invest into unregulated products.  

With all the stories and theories being promoted by the Product manufacturers and the Political parties, about China plus 1, India going to become world manufacturing hub, Energy leader, Viksit bharat and what not..every second person calls himself a Long term investor.   

However, even with this mindset, their portfolio shows their short sightedness when they ask for the products which have delivered high returns in the recent past, and start questioning the investments which are not doing that well. 

As per Morgan housel – “Saying, I am in for the Long term is a bit like standing at the base of Mount Everest, pointing to the Top and saying, “That’s where i’m heading.” In Investing saying you have a ten year time horizon doesn’t exempt you from all the nonsense that happens in the next ten years. Everyone has to experience the recessions, the bear market, the melt downs, the surprises, which one does not see in the bullish times with the positiveness around.

In this article I would like to point out a few mistakes which I am seeing people are making these days i.e in the Rising Markets, which have high potential to ruin the financial health when the situation turns negative.

Now, please understand that these are the basic core fundamentals and principles of any good financial planning approach which many investors tend to ignore or forget when their portfolio is doing great. If you think that you have someone in your contact who may need this reinforcement…do share the article with that person. 

Investment Mistakes to avoid in Rising Markets

1. Neglecting Asset Allocation

We know equity is a growth asset, and we also know that it is the most volatile and risky asset. Then why do we tend to forget the latter while investing in them, especially in rising market trends?

Knowing about: Risks and actually experiencing it are two different things. 

In Bullish times every investor wants to have high equity exposure, by labeling themselves a long term investor. Even we find many new investors entering into the equity markets looking at the recent past returns assuming this is the only reality, and equity is meant for growth only. 

This is no doubt true that equity investment will get you the growth you seek in your portfolio. This asset class is the one that can beat inflation. 

But this is also true that this growth comes with a cost. Cost of Volatility, Recessions, Multi Years of slowdown …and only those who pay the price can enjoy the benefits.

This cost is quite painful, in fact every cost is painful to pay, which is why you prefer things for FREE. But you can reap the benefits only if you are ready to experience the challenges. If you have not experienced this yet, then you are still not an Investor. There is a long way to go.  

In bullish times we tend to forget the costs attached and the pain it may bring in and in what form. We take all kinds of risky calls, even trade futures and options to make money faster.

The below drawdown table is showing the 5 worst falls in 3 major Stock Market Indexes since 2011. And these or the worse to these can repeat in future also. When and with what reason we don’t know. Are you prepared to participate?

Seasonal investors know that consistency matters more than intensity, which settles them for average returns coming in for longer tenure to enjoy benefits of compounding in Investments.

Your Equity exposure should be commensurate with your Risk appetite, which comes from your goals, experience and beliefs. If you have never seen any big  market fall, following a multi year slowdown in the past, you may have a wrong notion of how the market actually works.

Be cautious, and do not go overboard on equity or go only with professional guidance and handholding, is the advice here.

Read more: How to decide an ideal Asset Allocation mix?

2. Failing to Rebalance:

Besides having a Right Equity Allocation in the first place, it is important to accept that allocation keeps changing with market movements, and also with new purchases, SIPs, Redemptions and even dividend payouts. You need to keep reviewing the portfolio at regular timely intervals and rebalance the same, so as to avoid any bad surprises. 

Like I mentioned above, in rising times, investors tend to miss or ignore the rebalancing, just not to disturb the growing portfolio. But please do understand that Rebalancing is required to maintain the growth. 

Rebalance is also required in the downtimes, when investors prefer to stay safe but the right approach would be to increase the Equity allocation.

3. Overlooking Diversification:

Besides being high on Equity, you should also make sure that your portfolio should not be skewed or over invested into one particular sector or market segment. 

This is what was seen in 2008 when portfolios were more tilted towards Infrastructure, in 2002 when it was towards IT stocks, and now people have more Small caps in their portfolios.

Every second day, I receive emails from readers asking about small caps, some also quote scheme names. Even the clients who are not invested in, want to have my opinion on this segment.

Just like Asset Allocation, it is important to have an ideal Asset location at place. 

These days Small caps are in demand. Pre covid, Index funds (large caps) were the flavor. On the debt side, Credit Risk schemes were preferred. 

Ideal portfolio is the one having all the flavors in it. Concentration looks good only on specific times, but diversification keeps your portfolio going and growing for the long term.

4. Following Social Media Tips

Be cautious of Investment advice from unverified sources. In good times, you will find many social media influencers or self-proclaimed experts, mushrooming around on different channels, to provide financial tips. 

Their tips result well (if at all) only because there’s Euphoria going on around. This will gain them more followers but does not make them subject matter experts. In fact experts never give advice in general. Their advice will always be personalized to your situation, and under regulatory domain. 

One should be wary of such people and their “advice”. Moreover, if they are so great in what they do, I don’t understand what is stopping them from being Registered with SEBI.

However, the Regulator is watching all this, and may come out with some regulations soon. But you as an Investor be cautious before acting on any tip you have received in the media.

5. Never Compromise with basic Financial hygiene

Don’t think of Investing your emergency fund money into Equity oriented Assets, whatever positive signals you are getting from the Markets. 

Do not move your near term goals money to equity. 

Sometimes you may like to go beyond equity to make ‘more’ money, by investing in alternate Investments like crypto currencies, or Invoice discounting. Be sure to use alternates as a satellite investing without disturbing your goal oriented planning structure. 

Conclusion:

Yes, the process oriented structural approach is quite boring to follow when you want action and excitement, but this is the only you will build long term wealth.

Markets don’t behave the same always and until you have participated in ups as well as downs, you cannot call yourself a good investor.

Exciting opportunities do come, you may find some stock at low valuation and want to increase exposure, or may like to increase allocation in some specific sectors…that is fine as long as you are doing it with reasons, following research backed approach and having the broad asset allocation in place. Remember, investing is a marathon, not a sprint, and staying the course is key to success in any market environment.