Top Mistakes to Avoid in a Bull Run

R Venkatesh
Founder, GuruRam Financial Services

The investment market is peppered with multiple investment options that serve myriad purposes and goals. While some investments can provide downside protection to your portfolio there are others that can give a sharp fillip to your portfolio in terms of growth. Inevitably, when you think of portfolio growth you think of equities. The equity markets have always held a certain charm for investors, luring them with the promise of riches. But, the thing is that equity markets move in cycles. When they are down we bemoan the losses that accrue due to a fall in stock prices and when markets go up we celebrate their wealth creation potential.

However, during a bull market, when equities are going up and your portfolio is getting layered with gains, most investors throw caution to the wind and make mistakes that can prove to be very costly in the long run. To get you ahead of the curve, we share with you the top mistakes that you should try and avoid in bull markets.

1) Buying equities in frenzy without paying heed to fundamen-tal factors and risks: When equity markets are witnessing a bull run, investors think that there is only one direction in which stock prices can move and that is up. Often investors feel that if they don’t jump into the market and buy stocks then they might be missing out on handsome gains. As a result, they often end up buying the most popular or ‘hot’ stocks that everyone is buying. Unfortunately, in a hurry to capture stock market gains, investors forget to focus on company fundamen-tals and growth prospects. They end up purchasing weak companies that are the first to witness a price drop when the trend in the market changes. Always remember to stick to your core investment philosophy and do not overlook quality.

2) Ignoring asset allocation: One of the best ways to create a robust and well-diversified portfolio is through asset allocation. This entails spreading your portfolio investments across multiple asset classes in such a way that sharp negative movements in any one asset class do not have an inordinately Financial Planning large impact on your overall portfolio returns. Generally, your portfolio allocation strategy will take into consideration your risk profile, your return requirements, and your investment time horizon. Let’s assume that based on the above factors, you arrive at a portfolio allocation of 40 per cent equity, 50 per cent debt and 10 per cent cash in hand. Now, when equity markets start moving up, the proportion of equities in your portfolio starts increasing.

Slowly, it grows to 45 per cent and then to 55 per cent. Now, you are taking on more risk than is desired by your portfolio alloca-tion strategy. In such a scenario, it is best to rebalance your portfolio, sell some equities and bring the allocation down to 40-45 per cent. However, due to increasing prices and the fear of missing out on even larger gains, many investors choose to ignore their asset allocation strategy and continue to hold equities in a proportion that is not commensurate with their overall risk profile. This can have a detrimental impact on the portfolio.

3) Diverting debt to equity: Debt investments are made with the perspective of providing downside support to the portfolio and having some visibility on returns. Equity investments, on the other hand, are made with the goal of generating long-term returns. However, the risk that they carry is far higher than the risk in debt investments. Now, during bull markets, investors often feel that they must take full advantage of the bull run. In order to do so, they end up either exiting their debt investments or diverting the money that they had kept for debt investments towards equities.

This is a big mistake since the equity investments will not serve the purpose of debt investments. Equities are a great vehicle for growth but they also have a higher degree of risk. In a bull market, investors often end up ignoring the risk in equities and continue increasing their equity exposure in an attempt to capture all the gains. However, you must remember to make all investment decisions from the perspective of your overall asset allocation and ensure that you do not get carried away by the lure of equities.

The writer is the Founder, GuruRam Financial Services
 Email: gururamforyou@gmail.com
 Website: www.gururamfinancialservices.com