Why navigating stock market boom requires caution

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Read this | From profit to penalty: The perils of insider trading in your employer’s stock We’ve all heard the adage: Human memory is short and fickle. Throughout history, from the tulip mania of 1657 to the 2008 financial crisis, market events have repeatedly taught us the same lessons. Yet, many fail to learn because human behaviour and emotions, driven by greed and fear, remain unchanged.

So, how can we safeguard ourselves against emotional pitfalls? First, it's essential to set aside an emergency fund for uncertain times. The pandemic brought medical emergencies, job losses, and business closures into sharp focus. Building an emergency corpus—investing in liquid, low-volatility assets equivalent to six to 12 months of expenses—can help weather these storms.

Another critical step is creating a financial plan and adhering to the asset allocation it prescribes. Discipline in sticking to this plan protects us from the temptations of greed or the fear of missing out (FOMO), preventing our emotions from becoming our worst enemy. A well-thought-out plan ensures we don’t overextend when one asset class is thriving and encourages us to maintain our SIPs even when the outlook appears bleak.

And this | Want to invest in foreign stocks? Keep in mind the added costs and hassle. It's also vital to accept and be comfortable with the fact that wealth creation involves navigating the volatility inherent in markets. Understanding this can condition us to capitalize on market fluctuations by adopting a contrarian approach when appropriate. “Be greedy when others are fearful and fearful when others are greedy," Warren Buffett famously said.