Investing in a bull market

Investing in a bull market
30 Sep, 2007, 0901 hrs IST,Kavita Sriram , TNN

The stock markets are brimming with optimism. Money is pouring into the market like never before. The index has embraced unimaginably new highs. For now, it appears that the bull-run is at the horizon. For a true bull market, at least 20-25 per cent of the stocks must be on an increase and that too for a sustained period say two years. An upswing market is considered a good time for the investor.

What sort of a strategy must investors adopt to make it rich in a bull run? It is not unusual to find some stocks faring poorly in a bull market and some doing exceptionally well in a bear market. A bull run implies a booming economy, low unemployment rate, high production of goods, and low inflation.
The market ups and downs follow cyclic patterns.

For now, it is the time of rising index and increasing volatility. In a bull run, investors follow the formula 'buy low and sell high'. It is now time for investors to sell their stocks and book profits. Investors need to make well-educated and investigated investments in the markets.

Mere speculation can prove costly. Suppose in a bear market one stock fares poorly. An investor who has done enough research will know the reason for its fall. There may be something fundamentally wrong with the stock and the company policies.

Or the slide in the stock's price will be a reflection of general pessimism pervading a bear market. If an investor knows that it is the latter, he will stay calm and may be even add more stocks of the company to his portfolio. On the other hand, if he believes that something is fundamentally wrong with the stock, he may decide to sell it and stop further loss.

The scenario holds much the same in a bull market. Some stocks may become highly overpriced. An overpriced stock in a heated market is sure to burst when the bull run ends. Some investors prefer to sell all their shares and make profits. Another strategy is to sell some of the shares and buy back the stock when the price falls back to reasonably low levels.

The value of equities tends to rise fast in a bull run. Predictably, the equity investments in your portfolio will become disproportionately higher. Depending upon your age, objectives and financial obligations, you would have arrived at an asset allocation plan.

In order to stick to the asset allocation, make a judicious down-sizing of the equity component. This will provide ample cushion in case the bubble bursts and markets fall. In a bull run, investigate the real value or worth of the stocks. Do not invest in overpriced stocks. It is advisable to sell overvalued stocks. Exit immediately if you feel the prices have gone up adequately.

Invest regularly. The power of compounding and systematic investment plans goes a long way in wealth accumulation. Finally, bear in mind that there are no permanent bull and bear markets. Disciplined investing and avoiding speculation will help investors.