4 things to avoid when markets trade at record highs

Improved Goods and Services (GST) tax collection, positive news regarding COVID-19 vaccine from leading drug makers and better macro data have sent domestic indices soaring. Both the Sensex and Nifty have hit record peaks.

While erratic investor behaviour is well-known and documented when markets nosedive, it’s not much different when the opposite happens.

When markets trade at record highs, rational and logic take a backseat, and to make quick gains, investors end up committing certain mistakes they rue later. So, what are the things you should avoid in such a scenario? Let’s find out.

Avoid Investing in Bulk

Jumping onto the bull bandwagon, retail investors often end up investing in bulk when markets are trading at a peak. This must be avoided at all costs. Instead, they should invest in a staggered manner, diversifying their investments across asset classes.

If bulk investments are to be made, balanced advantage funds can prove to be a good bet as they dynamically adjust the equity and debt component as per prevailing market valuations. These funds lower equity exposure during market highs to prevent losses and vice versa.

In a bid to earn profits in the shortest possible time, investors tend to time the market. Instead, they should focus on remaining committed to their investment for the long haul for meaningful gains.

Don’t Cash Out from Quality Stocks

During a market surge, valuation of high-quality stocks may seem overstretched. A common mistake committed in such a scenario is to sell them and buy stocks trading at lower valuations.

The move can prove to be detrimental in the long run. Also, one shouldn’t buy low valuation stocks of the same industry by selling high-valuation ones. Fundamentally sound stocks will always add to your wealth in the long term and provide superior risk-adjusted returns.

It’s prudent to stay with winners as the fundamentals of low valuation stocks may not support fresh investments into them.

Changing Risk Appetite

When markets are in a state of euphoria, suddenly investors tend to enhance their risk profile. Even a conservative investor becomes aggressive.

However, it's important to understand that a change in risk profile doesn't materially change their risk appetite. A conservative investor, more often than not, will get nervy even at the slightest market swings.

Any act conducted in such a scenario could off-balance one’s asset allocation, putting financial plans in jeopardy. It's advisable to keep emotions under check and one must stick to his original risk appetite.

The Final Word

Markets are overheated now, and therefore, it’s vital to exercise caution. Picking up the right stock at a fair price should be the focus, instead of buying stocks with lower valuations with no change in a company's fundamentals.

Greed to make quick bucks should be tamed, and the emphasis should be on looking at the bigger picture encompassing your financial goals and risk appetite, among others. Avoid relying on emotions and getting carried away in the rally.

Happy investing!

(Rahul Jain is Head Edelweiss Wealth Management)