We are always prepared for when the markets are correct. As rational investors, we know we should invest more in equity-based investments when the markets are low. But, do you know the right action to take when the markets are at a high?
Traditional investor mentality
Whenever the markets witness sharp extremes of high or low, investors become cautious about their next move. However, being extra cautious can often reduce the potential of the investments and make the investors take decisions that do not serve their best interests.
Traditional investors usually see the market high as the perfect moment to stop their ongoing investments and sell their holdings.
They then wait for market corrections to re-invest this money. This can be the right decision for investors who require money at that point in time. But liquidating your assets can create a huge speed breaker in your wealth creation journey.
Investment strategies during the market boom
1. Review your portfolio
This is the first step before you take any decisions related to your investments during extreme market movements. Do a thorough analysis and review of your portfolio.
In this review, make sure you go fund by fund to check the performance. A detailed portfolio review will help you know what has changed in your investments from the time you invested in those market conditions.
2. Rebalance your portfolio
The market volatility directly impacts your portfolio’s asset allocation. E.g., when you would have begun your investment journey, your portfolio’s equity: debt ratio would have been, let’s take, 50:50.
But when the markets boomed, the equity: debt would have increased to 70:30. This causes over-exposure to equity, which thereby increases the risk component of your portfolio.
As an investor, you should periodically rebalance your portfolio or as and when the market demands so that your portfolio still performs optimally and you are way ahead of the market curve.
3. Invest in dynamic asset allocation funds
A DAAF follows an intelligent asset allocation strategy depending on the market conditions. It works this way – When the markets are overvalued, this fund cuts down on its equity exposure and increases the debt allocation.
In contrast, when the market is undervalued and has the potential to grow, this fund increases its asset allocation towards equity and reduces the debt exposure in its portfolio.
Such funds provide the investors with the best of both worlds, that is, equity and debt, and generate steady returns regardless of market movements. This balanced fund investment is best for investors with a low to moderate risk appetite.
Additional read: Importance of starting investment early
4. Give importance to value investing
Even when the markets hit record highs, some stocks or shares are valued way below what they are worth. Value investing is an investment strategy that invests in stocks that are trading way below their intrinsic value and have a much higher potential for growth in the future.
Investing in such stocks or funds providing exposure to such stocks helps the investor gain growth opportunities in their portfolios.
5. Avoid lump sum investments in equities
The worst time to make lumpsum investments in equities is when the market is already booming and has a high P/E ratio. This means that the markets are already overvalued, and a correction is coming soon.
The market movements follow a wave pattern, where every time the market goes up, it corrects to a certain level. Instead, you could make SIP investments in equities, which captures all market movements and also gives you an additional benefit of rupee cost averaging.
6. Goal-based investing
Make a detailed investment plan to efficiently and effectively allocate your income. Make a set of objectives that you want to achieve with your investments.
It may include buying a house, purchasing a car, planning an international holiday, or your child’s higher education abroad.
When you know what you are investing for, you know what corpus you want to end up with. This helps you make your investment journey as smooth and straightforward as possible.
The bottom line is, that when the markets are at a high, do not sell your investments hurriedly and re-invest entirely in the debt market.
Also, putting your investments on hold can hurt your long-term goals and objectives. Follow the proper steps into rebalancing and diversifying your portfolio to ensure you are always in a comfortable position regarding your investments.
Moreover, short-term volatility is not harmful to long-term investors. Always keep your goals in mind and invest systematically.
FAQs
What investment strategies are advisable during a market boom?
The best strategy is to maintain a diversified portfolio, regularly rebalance your investments, and focus on long-term goals rather than short-term market fluctuations.
Is it wise to invest aggressively during a market upswing?
While it’s tempting, avoid excessive risk. Stick to your risk tolerance, and consider gradual increases in equity exposure rather than abrupt shifts.
How can I protect my investments during a market boom?
Review and update your asset allocation, set realistic profit-taking goals, and stay informed about market trends to make informed decisions during periods of growth.
