What to do when the market goes up?
Yesterday, Sensex ended at a record closing high. It went up 222.23 points or 0.61% at 36,718.60, while the Nifty was up 74.60 points or 0.68% at 11084.80. Most of the sectoral indices ended the day in the green. Although the market was all-time high yesterday, however- as a matter of fact, Indian stock market has been under a bull run for past couple of years.
But what to do when the market goes up? Should we enjoy or should we become conscious that the market may fall in the upcoming post? In this post, We are going to answer the same question. What should an average investor actually do when the stock market goes up?
First of all, celebrate.
Isn’t this something which everyone wishes for when the invest- Market going higher and higher.
If you have invested intelligently, then your portfolio would also have gone up along with the rise in the market. And hence it a reason to celebrate. All the hard work that you did in researching, picking stocks and investing is finally giving sugary fruits. In short, this moment something that you might be waiting for a long time to occur and it finally happened. Therefore, ENJOY.
Nevertheless, when the market goes up, there may be few behavioral issues associated with it that you can notice in your day-to-day lifestyle. It’s important to understand them as these behavior change might hurt your investment strategy. Here are a few of the observable behavioral issues when the market goes up.
Behavioral Issues when the market goes up:
1. You’ll feel richer which may lead to increased personal expenses.
I remember the days when I used to go out to dine with friends whenever my portfolio rises over Rs 500 in a single day. I know it was stupid. Nevertheless, I and my friends were insanely interested in the market movements. The whole discussion during the dinner was regarding the same topic- which stocks went up and why I bought that stock. At that time, I was a recent college graduate who was making money from stocks alongside his regular job. Moreover, I enjoyed the fact that I’m making a passive income.
Now when I look back, I understand why this strategy was really stupid? The rise in my portfolio doesn’t mean an extra profit until and unless I sold those stocks. That was just the unrealized gains (I didn’t sell any stock). And in most cases, the profits kept fluctuating from the next day.
Overall, whenever the market goes up- you might notice increased personal expenses in your day-to-day activity. However, you should remember that this profit as a non-realised gain and hence, you must re-think before increasing your personal expenses.
2. You might become over-confident
When your portfolio is high and everything is working great, over-confidence is an obvious behavioral issue.
During such times, you will get the feeling that you’re awesome. Your strategies are working and hence you have mastered the art of investing. However, this might not always be true. Sometimes, your stock might go high along with the market and not because of its fundamentals.
I remember the time when my friend, Gaurav -picked Sanwaria agro at Rs 7.35 (September 2017). The stock moved from Rs 7.35 to Rs 28 within two months. Although he was not even three-months-old in the world of investing at that time, he started feeling that he was a seasoned stock market investor. And he became so overconfident that he bought 2x quantity of stocks than what he originally purchased at a price of Rs 25 per stock. The stock moved down after touching Rs 28 mark and currently it is trading at Rs 13.35. Overall, although Gaurav purchased the stock at a very discount price, he didn’t make any significant profit or loss. Nevertheless, he learned an important lesson- ‘don’t become overconfident when your stock goes up in the bull phase.’
3. Your risk taking ability might increase:
Increased risk-taking ability is the byproduct of over-confidence.
People generally research a lot before investing in any stock when the market is not doing well. Although the stocks might be trading at a discount during that time, but they are afraid that the market might go even lower.
However, when the market goes up and everyone you know is making money- you might be inclined to take more risks. During bullish phase, people tend to invest more as they do not want to miss the opportunity.
4. You might lose focus on your investment discipline:
It’s really common for the investors to lose sight of the investment decisions when the market is high. Maybe you started investing with a strategy to build a diversified portfolio with equal investment in different sectors. However, as one of your stock is doing exceptionally well, you might be willing to sell all the other stocks and invest in your winning stock.
Or maybe, you might be planning to change your strategy from a diversified portfolio to investing intensely in the mid-caps as they are performing the best during that market. Overall, it’s difficult to follow a disciplined investing strategy market is high. Most people easily lose focus on their investment discipline when the market goes up.
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The Golden Rule to Follow When the Market Goes Up
Stick to your Strategy:
This is the golden rule to follow when the stock market goes up. As discussed above, when the market is high, you will notice many behavioral issues in your daily lifestyle. You will start feeling richer and might plan to buy your favorite automobile. Or, you might plan to invest more and more in the market to ripe extra profits.
But sticking to your original plan with which you started investing in the best approach here. If you are investing for your retirement fund, then let your investment continue to run. Moreover, invest regularly in the market with the amount that you initially planned. Don’t sell off your stocks just to keep that money in your bank account – if your targets has not been achieved. You might have made some good profits when the market goes up. But it has the potential to give even better returns. Overall, Ignore the short term market profits and focus on your long-term goal.
BONUS: Rebalance your portfolio
Rebalancing your portfolio is also a good strategy to follow when the market goes up.
For example- let’s assume that you initially planned to invest 70% in equity and 30% in debt funds. However, when the market is high (and your stock portfolio is in profit), this allocation might change to 75% in equity and 25% in debt funds. Here, you should rebalance your portfolio to the original ratio of 70:30.
Quick Note: Rebalancing works similar to averaging your portfolio. For example, here when the market is high and you purchase debt funds to rebalance your portfolio- you might also be averaging your debt funds. You are purchasing debt funds when they might be down (contrary to the market which is high).
When the market goes up, it’s definite reason to celebrate. However, during these times, you can also expect some general behavioural changes. You might feel a little richer when your portfolio is high. However, remember that these are non-realized profits and hence, you might not be as much rich as you think. You only have the money on paper and not credited to your account. Lastly, ignore the highs and stick to your investment strategy & your long-term goals.