Eight investment mistakes to avoid amidst the market highs

Do not fall for the false promises of a booming share market. Evaluating your needs and goals is the right option. Image: Shutterstock

There are two types of stock market investors—those who have invested in the market and others who are sitting on fences. Existing investors are cautious and contemplating booking profits and those who are sitting out are wondering when to enter. Should you book profit or remain a bystander? Let's understand what to do when the stock market is at an all-time high.

Know that personal finance is more personal than finance. Therefore, plan everything according to what works for you. You can’t hire others to do push-ups for you; similarly, you cannot blindly invest in financial instruments that might have worked for your friends. You need to focus on your goals, risk profile and create an asset allocation that helps you build a winning portfolio.

Whether you like it or not, luck does play a role. Avoid becoming overconfident in terms of stock picking, thinking that you can repeat it often.

A market correction is the best time to enter and buying the dip mirrors a bargain, assuming that the price will go up from there. Yes, you should make the best use of any market correction and accumulate stocks and mutual funds units to top up your portfolio. But do not forget to manage your risk while buying the dips as sometimes the stock prices are down for all the wrong reasons than a healthy correction—for example, the stocks of YES Bank or Vodafone IDEA. The ideal approach would be to spread your investments over 6-8 months than invest a lump sum.

Book profits now and invest when the market corrects is nothing but a belief that you can time the market. Timing the market is a classic mistake that many investors still make. Many investors booked profits when the Sensex was at 47000 levels, thinking they would get back in the market after it crashes. Sensex is at more than 58000 levels now. Therefore, what is essential is the time you spend in the market and not the timing.

The best thing a market high can do to your portfolio is to help you sell your dud stocks and mutual funds schemes. Booking losses are equally important as booking profits. Chucking a dud stock with a slim chance of recovery will be more rewarding than staying with it. Many dud stocks also rallied amidst the overall stock market high and it presented a perfect time to clean up your portfolio. Remember, you are here to make a profit, therefore do not marry your stock.

One should never disrupt the compounding process. The whole idea of doing the SIPs is to invest at regular intervals to benefit from rupee cost averaging and to mitigate market volatility. One should not stop their SIPs out of concern for market movements.

Sitting tight or staying invested for the long term should not be misconstrued as inaction. Instead, you should review your portfolio and re-allocate basis your risk profile. For example, if your risk appetite allows you to invest 60 percent in equities and 40 percent in debt, you should rebalance your portfolio that might have changed amidst the market high.

Have you achieved your financial goal earlier than you had planned? For example, say you wanted to generate Rs 50 lakh by 2021, which you have achieved. Now it makes a perfect case to book profit or redeem your investments.

The writer is a chartered accountant and founder and chief gardener of Money Plant Consultancy