If you are a small investor and have just about started trading, then you would be surely intimidated in the midst of a bull market. Your fear will be, and rightly so, how to trade bull markets and how to go about investing in bull markets? Clearly, there are no simple answers to the question. When small investors see the markets in strong bull mode, they fear that the correction could be round the corner. What should small investors do in such circumstances? Here are some bullish market strategies.
1. Stick to a quality equity portfolio
In the beginning of the bull market, you find a lot of good, bad and ugly companies rallying with the market. As the bull market matures, you find the markets becoming more selective in rewarding only certain companies with higher valuations. One of the basic rules in a bull market is to gradually move towards quality. Your shift to safety must be gradual with the rise in market valuations.
2. Be guided by your financial plan
That is your best bet in a bullish market. Your financial plan lays out how much should be the allocation to equities, debt, gold and liquid assets. Stick to that and the moment your allocation goes out of line bring it back to the original. That will ensure you automatically book profits at richer valuations and have liquidity when cheaper options are available.
3. Keep churning your profits
Many investors wonder if churning and booking profits is consistent with a long term approach to investing. Actually, it is! There is a basic rule in the stock market trading that “If something is too good to be true, then it is probably not true”. You must follow the same principal when the markets are maintaining a bullish trajectory. Keep taking profits at regular intervals although you can also re-enter the same stock at higher levels. In a bull market, profit is what booked; all else is just book profits.
4. Adopt a phased approach to investing
The good old SIP approach works best in a bull market. You may wonder why! After all, in a bull market it is always better to buy in lump-sum and then hold till eternity. That is easier said than done. Practically, when you are investing in lump-sum you are never too sure of the right level to enter the stock. You may either wait for too long or enter a stock and regret too soon. The better approach is to adopt a phased approach to investing even in bull markets.
5. Adopt a phased approach to selling too
Just as you need to adopt a phased approach to investing, you must adopt a phased approach to selling out of a stock also. In fact, more so! When you exit a stock, higher the price you get the better it is. In a bull market, if you adopt a phased approach to exiting a stock then you are likely to end up with a much better price. That means, you may not always catch the top but each successive exit decision will happen at a better price. Moreover, you do not really have to worry about timing your exits to perfection!
6. Don’t wait too long on your losses
The problem with bull markets is that they can surprise you on the upside and on the downside. Imagine you had purchased a realty stock at the peak of the bull market in 2007. You would still be sitting on massive losses. The best way is to mentally prepare to exit at a certain price. That could be the technical support level or the price beyond which you are not willing to risk your money. Either ways, a loss booking discipline is very important in a bull market.
7. Be on the side of market momentum
This is a very important rule that small investors should follow in a bull market. A bull market is not uni-directional. But as long as the bull market is intact, the momentum is up. You should always stay on the same side of momentum. So, you can buy high and wait for the stock to go higher; or you can use dips to buy. Either ways, you should never try to outguess the market. In a bull market, the very idea of selling against momentum can land you in big losses. Momentum is the message that the market is trying to give. If you feel otherwise, then the market obviously knows something that you don’t. Just listen to what the market is trying to tell you!
8. Use options to hedge your risk
Warren Buffett may have described derivatives as Weapons of Mass Destruction (WMD). Actually, futures and options trading can help you manage your risk in a bull market. When you are in a bull market, you never know when the markets are going to correct sharply. The best you can do is to protect your downside risk by purchasing put options for protection. Of course, options may sound complicated in the beginning, but you just need to spend a little bit of time to understand these products better. Options are low cost protection against losses. You are just giving away a small portion of your profits to insure your portfolio.
Even in a bull market, small investors must stay focused on the long term. But ensure that you get your basics of profits booking, cutting positions and market momentum right.