Don’t Make These Five Mistakes During Stock Market Booms
By: Ankit Das
Tags: Investing, Money, Financial Planning, Money Management, Finance

Don’t Make These Five Mistakes During Stock Market Booms

Photo by Burak K from Pexels

Ask yourself, are you an investor or a trader?

If trader is your answer, you may leave immediately because the things which are going to be discussed below would not resonate with trading, they are solely from a long term investing perspective.

In times when the stock market is continuously making new highs, many investors get too excited or too much worried and make some major mistakes that they regret in the future.

Following are 5 major mistakes that I got to know by reading some books like Rich Dad, Poor Dad and The Intelligent Investor, and many articles related to investing on the web, that you must avoid if you want to be a successful investor and get wealthy in the long run.

Getting so optimistic that you change your risk profile

Most of the investors increase their equity allocation during the boom, and hence, change their risk profile, conservatives become moderate, and moderate become aggressive.

They don’t realize that the market is going to correct itself in the future, it always does, history is the proof. And once the market starts correcting, these investors get panicked due to their increased allocation in equity, resulting in their loss of confidence in equity.

So be rational, always maintain your asset allocation so that you don’t regret your decision in the future.

Thinking based only on the recent past

Most of the investors only remember what has happened in the span of two or three months in the past, and don’t want to think about what has happened to the market earlier, even when the market tries to repeat the same thing again and again.

For example, in December 2019 and January 2020, the market was setting new records, and no one ever thought what could happen so that the market corrects, but forget about correcting, what happened in February and March 2020, was much worse than that, it made a lot of investors go bankrupt.

If you are thinking that no one ever anticipated COVID-19 too, then my friend, no one anticipated The Dotcom Bubble Burst and The 2008 Financial Crisis too, except some of the legendary investors.

And the ones who stayed rational and raised cash during market highs are now sitting at the top because they followed this simple little concept of Warren Buffet,

Be fearful when others are greedy, and be greedy when others are fearful.

Photo by Burak K from Pexels

Stopping your SIP

At first look, it seems to be a wise choice, you would accumulate cash and invest it when the market corrects or crashes. But, do you know when is the market going to crash? No.

Let’s take the example of Nifty 50, an Index of the Indian Stock Market. It was started to be considered as high once it crossed the 11,000 points mark, some even started considering it high after 10,500 or 10,700 points. But see, it is now standing tall at the 13,000 points mark, and now is being considered to rise even high.

Even at the 13,000 points, it would require a 20% correction to get back to 10,400 points.

So stopping your SIP is not a good idea as no one knows what is going to happen in the future. Yes, you may lower down the amount you are investing through SIP and raise some cash side by side if the market is unimaginably high, but don't stop your SIP.

After all, these SIPs are the ones that are gradually going to increase the accumulation of your money in that mutual fund or stock, and in turn, giving the better benefit of compounding.

Never stop your SIP if you know that the stock is going to perform well in the future, neither in their highs nor in their lows, because your investments in the high times of that stock can be averaged by investing in them during their low times.

The biggest thing you can do to generate more wealth is to stay invested, if you won’t stay invested, you won’t be benefiting from the compound interest.

Investing in a lump sum

Photo by Alexander Mils from Pexels

This type of mistake is generally made by beginners who have recently seen just the highs of the stock market and invest heavily at the peak of the market, in the hope to get rich quickly because they have never seen the lows of the stock market.

Investing heavily at the peak of the market often results in a negative return when the market falls, which results in panic among the newcomers who have never seen this side of the stock market before. And as a result of which, they stop investing, and it takes a very long time to recover, sometimes even years, if they don't invest during the lows to lower down the average points of the market when they invested.

If at all, you want to invest during the high times because as we all know, we can’t foresee the future, invest via SIP, so that, not all of your money is invested at the peak if it falls in a few months after you start your investing journey.

Investing in companies that are being traded at their 52 weeks low

Most of the investors in search of low-cost stocks invest in companies that are being traded at a very low price.

Maybe, if their fundamentals are right and have not caught the eyes of big investors it can generate a fortune for you, but most of the time it’s not the case.

You see, there must be a reason due to which the company is being traded at its 52 weeks low in such an optimistic market, where all the companies are rising (maybe not fundamentally but in the stock market chart) high and investing in any company would give you a good return in the short run.

So maybe the company is not worth trading, that’s why it is being traded at such a low price, and it will be better to avoid them if you don’t know a lot about picking stocks.