Bull markets are widely perceived as periods when anyone can make money. Rising indices create confidence, the news cycle reinforces optimism, and retail participation surges.
Yet, despite favourable conditions, a significant number of investors still lose money. The reasons are not rooted in market behaviour as much as in how investors approach investing itself.
The Real Drivers of Long-Term Returns
Long-term returns are shaped by three factors: asset allocation, manager selection and security or stock selection. Asset allocation alone contributes nearly 90% of investment outcomes. Manager selection influences most of the remainder, while stock selection, ironically, where retail investors focus the most, accounts for less than 1%.
This imbalance sits at the heart of most investment failures. Retail investors gravitate toward stock picking because it appears to offer the fastest route to wealth. A single 10x stock can theoretically change one’s financial trajectory.
“However, even the best professional managers get many picks wrong, which is why they diversify and operate within defined risk frameworks. Retail investors, lacking the same discipline and time commitment, often abandon their investments the moment their personal risk threshold is breached. The result is prematurely closed positions, even when their original ideas had merit,” said Mr Rohit Beri, CEO and CIO, ArthAlpha.
Why Investors Focus on the Wrong Things
Most investors do not start with a clear understanding of their risk profile or a structured asset allocation plan. Instead, many attempt to manage their portfolios themselves, balancing investing alongside full-time jobs or businesses. This is not a question of capability; it is a question of bandwidth.
“Wealth management requires continuous monitoring, research and risk management activities that professional managers in mutual funds, PMS and AIFs undertake as their primary responsibility. Delegating this function to specialists often produces far superior outcomes than a do-it-yourself approach driven by limited time,” commented Rohit Beri.
The Market Timing Trap
Layered on top of misplaced focus is a common behavioural error, attempting to time the market. Even experienced investors acknowledge that consistently predicting short-term movements is extremely challenging.
Market icons like Warren Buffett repeatedly emphasize that successful investing is about time in the market, not timing the market. However, in the pursuit of perfect entry and exit points, retail investors frequently stay out of the market when they should be compounding their wealth. In trying to time the dips, they lose the opportunity for uninterrupted compounding.
How Behaviour Amplifies Mistakes
“Retail investors typically enter when the market narrative is overwhelmingly positive-when indices have already delivered strong returns and valuations are stretched. By investing near peaks, they expose themselves to higher downside risk. When corrections inevitably arrive, these investors often exit at the bottom, crystallizing losses,” stated Rohit Beri.
This behaviour runs counter to how seasoned investors operate. Rohit Beri further said that professional investors pare down exposure when markets are overheated and deploy capital when valuations become attractive. Retail investors, however, often buy high and sell low, driven not by fundamentals but by recent market movement and sentiment.
Leverage: A Hidden Destroyer of Capital
Another factor that erodes returns is leverage. Bull runs are never linear; they include sharp interim downturns. A leveraged investor experiences exaggerated losses during these pullbacks, often triggering margin calls. Forced liquidation at precisely the wrong time wipes out capital and prevents participation in the recovery phase, even if the broader market trend is upward.
The Diversification Dilemma
“Portfolio construction errors also contribute to underperformance. Some investors hold an excessively large number of stocks or mutual funds, diluting the positive impact of their best decisions. Others concentrate their portfolios into three or four stocks, often driven by FOMO rather than structured conviction,” commented Rohit Beri.
Both extremes are harmful. Overdiversification leads to muted returns; underdiversification leads to extreme volatility. Manager diversification is useful, but excessive duplication across dozens of funds adds no real value.
Misjudged Risk Appetite and Overconfidence
“A recurring challenge is the gap between perceived and actual risk appetite. Investors often believe they can tolerate volatility until they face a 30-50% drawdown, particularly in small- and micro-cap stocks. Overconfidence in one’s ability to analyse and select stocks leads to concentrated bets that crumble under pressure. When losses materialise, panic-driven exits lock in damage and eliminate the possibility of recovery,” said Rohit Beri.
Ultimately, investing is a discipline of patience and structure. Wealth is created not through frequent trading or perfect predictions but through appropriate asset allocation, professional management and staying invested long enough for compounding to take effect.
For most investors, the most effective approach is straightforward: understand your true risk appetite, build a thoughtful asset allocation plan, work with a financial advisor, and entrust capital to capable fund managers. This strategy may not promise overnight 25% CAGR returns, but over the long run, it is far more likely to outperform emotional, time-constrained do-it-yourself investing.