Kavan Choksi Discusses the Approach to Follow When Investing in a Bull Market
A bull market involves a sustained period of rising stock prices. It tends to be characterized by a growth of 20% or more above recent lows, as measured by the S&P 500 or another major stock index. As Kavan Choksi says, bull markets generally go hand-in-hand with positive market sentiment and investor confidence. Very often, positive sentiment is driven by economic expansion. As investors observe improvements in economic conditions, they expect those improvements to deliver greater business profits. This essentially promotes more trading activity and rising stock values, with an increasing number of investors positioning themselves to gain from stronger earnings going forward.
Kavan Choksi briefly talks about the approach to follow when investing in a bull market
One has to be first invested in stocks in order to profit from a bull market. Hence, in the early stages of a new bull market, one must check their asset allocation. This would be the ideal time to increase exposure to equities and lower exposure to cash and bonds. One, however, must proceed with caution. It is vital to understand that market conditions can promptly change, and a true bull market may end up being slower to materialize than one had expected. Moreover, one must not just assume stocks are only going up from here and avoid investing cash that they may need in the next five years.
Investors should try to hold a good mix of stocks, bonds and cash. In case they are not sure what the mix may entail, it would always be better to stick to strategies like the Rule of 110 for an age-based allocation. For this, investors has to subtract their age from 110 and invest that percentage of their portfolio in stocks. For instance, if the investor is 40, then their allocation would be 70% stocks and 30% bonds and cash. Such a composition would prepare them for a broader range of scenarios instead of going all-in on stocks.
If an investor really wants to increase their stock exposure, they should consider adding equities from multiple industries. Industry diversification helps in protecting the investors from sector specific weakness, and provides them with access to sector-specific strengths. In most cases, growth stocks and sectors appreciate faster than peers and the overall market and therefore it would be smart to invest in them. The majority of growth stocks belong to young and innovative businesses that make use of new age technologies to create efficiencies and solve important problems. However, one must note that even though growth stocks tend to perform well in bull markets, they can also be riskier than more stable, established companies.
As Kavan Choksi says, for patient investors, value investing can prove to be a smart move. Value stocks basically imply to equities that appear to be underpriced. This means that they are trading for less than their intrinsic value. This usually happens when investors overreact to bad news or when the investing climate favours faster-growing assets. As optimistic bull-market investors prefer faster-growing assets, it is common to find value stocks lag behind when the market is strong. However, this can end up being a great buying opportunity for patient, long term investors. Value stocks are likely to show their worth in bear markets. Hence, one may use a bull market to increase the value stock holdings efficiently and prepare for the next bear market.
