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Thursday, September 18, 2014

7 investing mistakes to avoid in this rampaging bull market

There has been a sea-change in market sentiments ever since the Modi-led BJP received a majority in the general elections. The chaos, confusion and scams of coalition governments of the past many years have come to an end.

Modi is expected to usher in a new dawn of corruption-free, growth-oriented and economically inclusive administration that will restore India to the top echelons of world leadership. In anticipation, a new bull market has started – and as per consensus estimate of experts, it will be a multi-year bull market.

Even after 100 days – during which not much has changed on the ground (it may be too short a time to expect major changes) – the feeling of hope and expectation of ‘acche din’ persists. The setback for the BJP in the recent by-elections may be a temporary aberration. Today’s strong rally in the market has confirmed bullish sentiments.

For small investors who have not been able to participate in the bull rally so far, or the few smart ones who managed to get in early but are experiencing their first ‘real’ bull market, this is as good a time as any to be aware of some easily avoidable investing mistakes in a bull market. Here are 7 of them, not in any particular order:

Mistake 1: Taking expert opinion at face value

It is the job of market experts to voice their opinions – even if they contradict each other. Many have vested interest in the stock market, in spite of their disclaimers. Do not consider any such opinion as gospel truth. Use your intellect and common sense. Particularly regarding buy/sell recommendations, one should do their own due diligence and act only if convinced.

Mistake 2: Believing that a ‘new’ bull market has started

In a post three months ago, it was explained why this bull market may be 5.5 years old from a long-term perspective, and at least 1 year old from a short-term perspective. In other words, it can’t be considered ‘new’. That means, most of the low-hanging fruit have been plucked. One needs to be extra careful in selecting individual stocks for investment now.

Mistake 3: Thinking that a rising tide lifts all boats

In a bull market, small companies with low equity and questionable management start flying through the roof. The rise in stock price is often the result of circular trading among a few entities working in cahoots. These are leaky boats. They may rise when the tide comes in, but will sink soon – leaving small investors with a useless entry on their demat statements.

Mistake 4: Buying individual stocks on a limited budget

If you are a small investor getting your feet wet in the market, you probably don’t have much savings to spare. You may want to buy 10 shares of Tata Motors or 100 shares of Ashok Leyland. Don’t do it. If the stock price rises 10%, you will be tempted to book profits – missing out on a bigger payday. If the stock falls 10%, you may get into a panic and sell, instead of buying more. Better to start a SIP in a good equity fund. Build up your capital for 4-5 years, then think of buying individual stocks.

Mistake 5: Taking a personal loan to invest in stocks 

Don’t have enough savings? Still itching to enter the market? Forget about taking a personal loan. The interest cost will be prohibitive, and will need to be paid regardless of your portfolio’s performance. Buying an iPad or a fancy cellphone on EMI is bad enough – but you will at least have a useful asset. But once a stock starts falling like a stone, you may not have the will power or discipline to sell at a loss.

Mistake 6: Waiting for a correction to enter

Timing the market is difficult, if not impossible. It requires several years of investing experience to understand which correction to invest in and which correction to sit out. Investing at or near a market top may not give good returns in the near term, but investing your savings regularly and having a long-term (3-5 years) outlook is likely to provide inflation-beating returns.

Mistake 7: Investing without a plan

When you think about going on a vacation, you tend to plan well in advance to avail of cheaper air-tickets and better hotel deals. But when it comes to investing, you probably don’t even think about how deep the water is or whether there are sharks lurking before diving in. It is imperative that you make a financial plan and an asset allocation plan before buying a single stock or fund. The plans should reflect your financial commitments, aspirations and risk tolerance. Buying stocks or funds according to your plans will provide better returns and enable you to reach your financial goals.

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