Investors often make mistakes in a bull market when the stock prices soar, and over-optimism leads them to throw caution out into the wind and overload portfolios with equity to maximise gains. Addressing the guests at Outlook Money’s Retirement Expo 40After40 on the second and final day of the event on Wednesday, Sankaran Naren, executive director and chief investment officer of ICICI Prudential Asset Management, underscored the dangers of glossing over the pitfalls in a rising market.

Naren says, “The biggest mistakes happen when markets are at extremes—either very low or very high”. However, the answer to this question of how to invest in a bull market is very simple—by proper asset allocation. Naren emphasised asset allocation. “Asset allocation is one of the most boring things because what it means is taking money from an asset class doing well and putting it in another asset class doing badly. It is not easy to do.”

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Sharing his experience with the audience, Naren explained how the market behaved during a bull and a bear run over the years and advised them to practice asset allocation. “In the 34 years that I’ve seen markets, the biggest mistakes don’t happen when markets are flat; mistakes happen when markets are at extremes, either at very low or high.” To drive home his point, he said that in 2020, when the markets were low, people sold their holdings when they shouldn’t have.

When a market does well for three years in a row, people want to move to the derivative market, and that’s a challenge because people think making money in the derivatives market is easy. “If you want to retire happily, you can’t do it by exclusively investing in one asset class like equity. You can only improve it by practising asset allocation,” Naren stresses.

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He adds, “You (could) make it (retirement) rocky by trading in the derivatives market. If you want to make it pleasant, you have to do asset allocation; if you want to make it more pleasant, ensure that you don’t have any leverage. Today, I find people take leverage and invest. These models are very dangerous. You have to be very conscious from an investing point of view, or what you’re doing in such a period (market extremes).”

People are more prone to make mistakes during these two extreme market scenarios. So, if you want to make your retirement enjoyable, Naren advises people not to do anything drastic and just practice asset allocation.