After an exhilarating bull run, markets are showing signs of abatement. Of late, the Sensex suffered its worst slump in six months. This was bound to happen as markets were overheated, and a genuine correction hadn't happened since March 2020. However, in the midst of all these, bourses scaled record highs, rewarding those who had the patience to remain committed to their investments.
However, it's often during the bull run that markets were a part of that one of the most common psychology of investors cloud judgement - greed. It's during this time that logic goes for a toss, and the impulse to earn extra profits results in wrong investment choices. Let's dig deep to understand the implications greed can have when markets are firing all cylinders.
Wrong Estimate of Risk Appetite
Risk appetite is an essential investing element that you need to factor in while investing, particularly in stock markets. However, greed can result in overestimating your risk appetite, and you may end up investing in highly volatile stocks whose value can quickly erode when markets enter into a bear phase.
When markets are in an upswing, even the most conservative investors tend to get lured by the happenings and end up picking volatile stocks that increase the risk quotient of the portfolio by several notches. They foray into an unknown territory that robs them of mental peace when markets correct. Equity markets are inherently volatile, and a wrong estimate of risk tolerance elevates it even further.
In their bid to earn quick bucks, most investors end up investing in bulk. To put it otherwise, they end up timing the market. This has significant implications on long-term wealth creation. While investing in equities, it’s prudent to adopt a wait and watch approach and invest in a staggered manner. It always pays to test waters before committing.
While we are slowly coming out the effects of the COVID-induced pandemic, liquidity remains a major concern. In case investors suffer heavy losses, they can end up stretching their finances and miss out on essential commitments. On the other hand, investing in a staggered manner and being committed for the long haul can help one augment riches.
Choose Fundamentally Weak Stocks
To make meaningful gains from equity markets, you need to invest in fundamentally sound stocks. It pays dividends to opt for companies with robust financials and solid corporate governance. However, greed could lead you to chase fundamentally weak stocks whose valuations seem lucrative. While they may look promising in the short run, they fizzle out eventually.
It could also lead you to invest in penny stocks that have very low market capitalisation and are highly illiquid. With limited disclosure of information and large bid-ask spreads, penny stocks are pretty volatile and risky.
As evident, greed and getting carried away is a recipe for disaster. It may also lead you to cash out of quality stocks whose valuations may seem overstretched during a bull run. Logical thinking coupled with discipline and patience can help you stay on a solid footing.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
