Nothing excites investors like a bull market. Not only does the value of your stock holdings go up, but it also makes you feel confident about your stock-picking abilities.
However, if you are not careful, the feeling of euphoria can cause you to make mistakes that can cost you heavily down the road. Here are five behavioral mistakes you need to avoid in times of excessive market exuberance.
One of the biggest mistakes that investors tend to make in a bull market is that they mistakenly believe that they have mastered the art of stock picking and rush to invest in what they believe to be ‘hot stocks’ without doing proper research.
Remember, even seasoned investors tend to take a beating when the market falls. So, do not get overconfident and be cautious while picking stocks to invest in.
Do not change your risk profile unnecessarily
In a buoyant market, you might be tempted to change your risk profile to get higher returns, from conservative to moderate, from moderate to aggressive, or from aggressive to hyper aggressive.
While it might get you higher returns in the short term, it can result in heavy losses in the long term, as a result of which you might not be able to achieve your financial goals.
Do not change your risk profile unless you are convinced that it is necessary to achieve your long-term financial goals.
Do not stop making regular investments
When the market is hitting new highs every day, you might think that you could get much better returns by making large investments rather than making small, regular investments in the form of a systematic investment plan or any other type of investment plan.
It is a bad idea, as data shows that you stand to make more money by making regular investments in the market rather than making large investments when the market is at an all-time high.
Remember, investing in the market on a consistent basis can help you absorb the losses even in the event of a market crash. On the other hand, a large investment can result in heavy losses in the event of a crash, which you might find difficult to recover from.
Stay away from bad advice
One of the problems with an aggressive bull market is that it can make novice investors look like experts. Feeling supremely confident in their abilities, they might dish out bad advice, especially on social media.
That could prove to be disastrous for your portfolio in the long term. Just because they got lucky with their picks, it does not necessarily mean that you will get lucky as well.
Do not fall prey to the IPO craze
Many companies choose to come out with their IPOs during a bull market, when investor confidence is sky high, so that they can get the best possible valuations.
Be wary of investing in overvalued and overpriced IPOs. When the market eventually cools down, they might lose value and you could lose money.