Bull run: How should investors play rising markets?
(This story originally appeared in on Dec 06, 2023)
MUMBAI: The Sensex and Nifty are at record highs. Are you kicking yourself for not investing when these indices were at their lows earlier in the year? And will FOMO force you to invest at these record levels?
Retail investors may get swayed by looking at numbers in isolation without considering past events and likely future situations. Worse, some even make the mistake of investing their hard-earned money in such times without diligence, only to regret later.
Industry experts warn of such behaviour. 'Investing by impulse' is not the right approach in the long term. «Investors should refrain from 'recency bias',» said a veteran of the mutual fund industry. Recency bias is a behavioural issue where people tend to give more importance to recent events over historical ones.
For example, if one looks at the current sensex level — that is near the 69K mark — without considering the fact that in the last one year, it has given a return of a little over 10%. Over the last two years, the compounded average return is just a tad above 10%. There are other assets which have given much higher returns: Gold has given a return of nearly 19%, while Bitcoin's 150% return is unmatched by any other asset class.
«Now, if a person is investing just because the sensex is at an all-time high, he's giving in to recency bias,» the fund industry veteran said. «I see a lot of cases where, along with recency bias, investors are also captive to the behaviour of herd mentality.» In such situations, inexperienced investors follow friends, relatives and peers who are also investing without much thought or experience.
So, what should be the right strategy for retail investors to invest for the
