Smart Investing in Bull Markets: How to Handle Asset Allocation Without Making Costly Mistakes

In bullish times like now, many investors make their biggest mistakes. Why? Because it’s easy to get caught up in the excitement and lose sight of a proper asset allocation strategy. Let’s discuss how you can avoid common pitfalls and set up a plan to manage your money wisely.

Common Mistakes in Bullish Times

1. Ignoring Your Asset Allocation Plan: Many people had a plan but have abandoned it as the market soared. Without a plan, you’re just reacting emotionally.
2. Chasing the Hottest Asset: Often, people follow the assets that have been performing the best, hoping the good times will continue forever. But markets don’t rise endlessly.
3. Using Long-term Assets for Short-term Needs: Many rely too much on stocks for short-term needs, which can lead to trouble if the market turns.

Stocks

If you have long-term goals, you need a significant portion of your assets in stocks. But after the market has surged, your allocation may be skewed.

• Should you sell? If your allocation is way off, consider gradually selling poor-quality stocks and funds. Don’t rush; selling a little at a time can help balance your portfolio.
• Under-invested in stocks? Set money aside and invest only when you find good stocks at fair prices. If you can’t find any, hold cash. These days, even cash can offer attractive yields.

What you shouldn’t do: Sell everything in fear of a crash, go all in thinking markets will keep rising, chase rising stocks without research, or invest in sector-specific funds without a solid reason.

Gold

Gold has performed well, but don’t over-invest just because of recent gains. Gold is typically a “bad times” asset, meant to protect during downturns. Much of the recent rise in gold prices in India comes from the rupee losing value against the dollar.

Keep a balanced perspective: Own gold, but stick to your target allocation (usually 5-10%) and remember why you’re investing in it.

Real Estate

If you need real estate, buy it. Living in a rented home while betting big in the stock market is a bull-market strategy that won’t last forever.

But remember, investing in real estate requires skill and time, just like stock investing. If you have the expertise, it can be a good opportunity, but buying real estate can skew your asset allocation and impact your returns, especially if you take on debt to do so.

Approach real estate based on your needs rather than viewing it purely as an investment.

Bonds, Deposits, and Cash

These might not be the most exciting assets, but they offer stability. You can get around 9% returns on bonds with low risk today, which is quite attractive compared to the volatile stock market.

Would you prefer a guaranteed 9% return or risk losing 20% for a shot at 12%? Sometimes it’s better to play it safe. If your asset allocation has drifted too far away from these safer assets, now might be a good time to fix that.

Conclusion: Sensible Asset Allocation Is Key

Asset allocation may sound simple, but it’s not always easy. The goal isn’t to chase the highest returns but to optimize them based on your personal goals and risk tolerance. By sticking to a well-balanced plan, you can manage risk effectively, even in a bull market.

The key is to stay focused on your long-term goals, resist the temptation to chase short-term gains, and maintain a sensible, diversified portfolio. Happy investing!