It is common to see investors react to market rallies with a sense of fear and apprehension. The rising prices and positive sentiment seem to make people uneasy, leading them to believe that the market has gone up too much and is unsustainable. However, this fear is often misplaced, and it is essential to have a deeper understanding of market psychology and profit-taking.
Typically, when the market is falling, people tend to remain relatively calm and accept that market downturns are a part of the investment game. However, when the market is on the rise, fear creeps in quickly, and investors become cautious. This fear-induced mentality is not only counterintuitive but also detrimental to long-term investment success.
The fear of losing profits is understandable. Continuous losses can make individuals hesitant to embrace opportunities for profit. However, this mindset needs to change. Profits are a positive outcome and should be welcomed rather than feared. On the other hand, losses should be avoided and not welcomed with open arms.
A case study on CNX INFRA index
From the bottom levels following the COVID-19 pandemic, the index has seen a significant rise. It went from around 2000 levels to 6200 levels over three and a half years. Many people may argue that this is an excessive increase, but when put into perspective, this growth is not extraordinary.
Prior to the pandemic, the infra index was already at 3500 levels. Hence, in four years, it has not even doubled.
Looking further back, in 2008, the infra index was at 800 levels, reaching 6200 levels over less than three and a half years. This rally demonstrates the true potential and capabilities of the market. Comparing this rally to a previous one where a similar increase occurred, it becomes evident that the current rally may not be as significant.
Similarly, let’s analyse the CNX IT index
This index has seen substantial growth from 11,000 levels to 38,000 levels since the COVID-19 bottom. While this may seem like an impressive increase, it is crucial to understand that the market has experienced even more remarkable rallies in the past.
For instance, between 1996 and 1999, the market rallied from 75.75 levels to 8700 index levels. This represents an increase of approximately 120 times within less than four years. Such mind-boggling rallies have occurred in the past, putting the current rally into context. Therefore, it is vital not to perceive the current market rally as a bubble that requires immediate avoidance.
It is essential to keep in mind that the market has the potential to surprise us, both in terms of how far it can drop and how high it can rise. This unpredictability necessitates the development and implementation of a rule-based system for investing, ensuring a structured approach and avoiding impulsive decision-making.
Should you be wary now ?
While it is true that all rallies will eventually normalise, this should not dissuade investors from participating in the current rally. Instead, it should emphasise the importance of having a proactive strategy in place. By carefully monitoring market conditions and having predetermined entry and exit points, investors can make informed decisions and mitigate potential risks.
Essentially, the fear that often accompanies market rallies is not necessarily warranted. Understanding market psychology and the role of profits in investment is crucial. Profits should be embraced and viewed positively, while losses should be avoided. By putting market rallies into perspective and having a rule-based system in place, investors can effectively navigate market fluctuations and optimize their investment outcomes.
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