Have you met the three sirens of the bull market?

Odysseus and the Sirens, an 1891 painting by John William Waterhouse

From WikiPedia:

In Greek mythology, the Sirens were dangerous creatures, who lured nearby sailors with their enchanting music and voices to shipwreck on the rocky coast of their island.

Odysseus was curious as to what the Sirens sang to him, and so, on the advice of Circe, he had all of his sailors plug their ears with beeswax and tie him to the mast. He ordered his men to leave him tied tightly to the mast, no matter how much he would beg. When he heard their beautiful song, he ordered the sailors to untie him but they bound him tighter. When they had passed out of earshot, Odysseus demonstrated with his frowns to be released.

The above is the first and probably the most beautiful example of pre-commitment and distinguishing signal from noise.

A bull market creates many sirens. And we, my friend, are like Odysseus. Unless we create a plan and commit to it, come bad weather or good, we are highly likely to make a mistake that we will repent later.

The three songs of the siren that you should be well aware of during a bull market are:

FOMO – Fear Of Missing Out.

Just because the whole neighborhood has doubled their money, is now the best time to increase your investment amount or risk allocation? Not really.

Don’t get sucked in. Don’t increase your investment amounts just because everyone around is making money. Use a plan like the Invest More Tomorrow(IMT) to systematically increase investments. IMT is another pre-commitment device where you commit to increasing your monthly SIP by 10% every year, in line with average expected income increase in India.

Similarly, don’t change your asset allocation to 100% in equity because suddenly everyone is saying “risk is good”. Stay steady, and keep re-balancing to your ideal asset allocation.

Book some profit –

The market is making a new high, you should book some profit. Isn’t that the most counter-intuitive advice ever?

Think about it. I don’t know of anyone who invests in the hope of never seeing a new market high. New market highs are how an investor makes money. What most retail investors get wrong is that they let their losers run in the hope of making back lost money and cut their winners with the intent of locking gains.

Let the winner’s run, don’t book profits. If you are hard pressed, book a vacation and stop following the market daily 😀

Wait for fall –

TV personalities and armchair pundits have called 200 of the past 5 market tops. Get the picture.

Don’t sell today because in three months the market will be lower and you can buy cheap. It will be true some day, but mostly will cause you heartache in the process. For most part of a bull market, what you sell today you will scamper to buy at a higher price within a month.

Where does it leave us. Simple, have a plan and stick to it and don’t make decisions based on unsubstantiated or biased advice. For example, is it really that bad to invest at market highs? and how?

Good luck and happy investing.

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